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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|x| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required).
For the fiscal year ended January 31, 2001.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required).
For the transition period from to .
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Commission file number 1-13437
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact Name of Registrant as Specified in Its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TWO CITY PLACE DRIVE, SUITE 380
ST. LOUIS, MISSOURI 63141
(Address of Principal Executive Offices) (Zip Code)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Securities registered under Section 12(g) of the Act: COMMON STOCK $0.01 PAR
VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
At March 31, 2001 the aggregate market value of the voting and non-voting stock
held by non-affiliates of The Source Information Management Company (the
"Company") was approximately $58,890,768 based on the last sale price of the
Common Stock reported by the Nasdaq National Market on March 31, 2001. At March
31, 2001, the Company had outstanding 17,257,108 shares of Common Stock.
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TABLE OF CONTENTS
PART I
Page
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ITEM 1. Description of Business 1
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements
ITEM 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
ITEM 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
ITEM 13. Certain Relationships and Related Transactions
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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SOME OF THE INFORMATION CONTAINED IN THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. WHEN USED IN THIS
REPORT, THE WORDS "MAY," "WILL," "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES, OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO: (I) OUR DEPENDENCE ON THE
MARKETING AND DISTRIBUTION STRATEGIES OF PUBLISHERS AND OTHER VENDORS; (II) OUR
ABILITY TO ACCESS CHECKOUT AREA INFORMATION; (III) RISKS ASSOCIATED WITH OUR
ADVANCE PAY PROGRAM, INCLUDING PROBLEMS COLLECTING INCENTIVE PAYMENTS FROM
PUBLISHERS; (IV) DEMAND FOR OUR DISPLAY RACKS AND STORE FIXTURES; (V) OUR
ABILITY TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY; (VI) COMPETITION; (VII)
OUR ABILITY TO EFFECTIVELY MANAGE OUR EXPANSION; AND (VIII) GENERAL ECONOMIC AND
BUSINESS CONDITIONS NATIONALLY, IN OUR MARKETS AND IN OUR INDUSTRY. INVESTORS
ARE ALSO DIRECTED TO CONSIDER OTHER RISKS AND UNCERTAINTIES DISCUSSED IN OTHER
REPORTS PREVIOUSLY AND SUBSEQUENTLY FILED BY US WITH THE SECURITIES AND EXCHANGE
COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION
TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS, WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We are a leading provider of information and management services for retail
magazine sales to U.S. and Canadian retailers and magazine publishers. We are
also a leading manufacturer of display rack and store fixtures used by
retailers.
Through our information services, we provide sales figures and product placement
and other related information in various user-friendly formats, including print,
CD-ROM and over the Internet. This information helps users to formulate
marketing, distribution and advertising plans and to react more quickly to
changing market conditions. Our information services cover over 7,000 magazine
titles and are provided to approximately 1,000 retail chains with approximately
80,000 stores and 400,000 checkout counters. We believe we maintain the most
comprehensive information database available for retail magazine sales and
magazine placement at checkout counters. We have expanded upon our experience
with retail magazine sales to provide similar information and services to
confectioners and vendors of general merchandise sold at checkout counters.
Through our management services, we help retailers to increase sales and
incentive payment revenues by reconfiguring and designing front-end display
racks, supervising installation, selecting products and negotiating, billing and
collecting incentive payments from vendors. Historically, as part of our
services, we arranged for the manufacture of display racks for many of our
customers. Since January 1999, we acquired five display rack manufacturers.
Manufacturing display racks in our own facilities allows us to be a full-service
provider of management services for the checkout area, or "front-end," of a
customer's store. We also can integrate the design and manufacturing processes
with our clients' merchandising strategies and better manage the timing of
display rack delivery.
In September 1999, we acquired Huck Store Fixture Company, a major manufacturer
and supplier of custom wood displays and fixtures to national retailers. Also,
in September, we acquired Arrowood, Inc., another manufacturer of wooden display
fixtures. These acquisitions enable us to meet demands for customized wooden
display fixtures from our major retail customers. This strategic broadening of
our base business provides access to new markets, solidifies existing
relationships, and further strengthens our leading position as the front-end
one-stop shop for retailers.
In March 2001, we signed a letter of intent to acquire The InterLink Companies,
Inc. ("InterLink") and its operating companies, including International
Periodical Distributors, Inc. ("IPD"), a leading direct distributor of
magazines, and DEYCO, a specialty national magazine distributor. Previously,
during February 2001, we acquired 15% ownership of InterLink. The acquisition
will provide us with exclusive access to magazine sales data that will expand
the daily, store level sales information available on our on-line information
database. InterLink is discussed further under the caption, "Business Segments"
and in the Liquidity and Capital Resources section of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
We believe that we are well positioned to use our existing relationships with
retailers and vendors to cross-sell our information and management services and
display rack, store fixture manufacturing capability, and our magazine
distribution services.
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INDUSTRY OVERVIEW
A substantial portion of the products sold in retail stores are bought on
impulse. It is therefore important to vendors that their products be on
prominent display in those areas of a store where they will be seen by the
largest number of shoppers. There are usually two such areas in a store. One is
a dedicated area called a mainline display; the other is the checkout area which
is sometimes referred to as the front-end. The front-end is visited by virtually
every shopper in a store. Shoppers typically must wait to complete the checkout
process and are more likely to see products on display in the front-end, which
increases the likelihood that these products will be bought on impulse. Products
suited to front-end display include magazines, confections and certain general
merchandise such as razor blades, film and batteries.
Vendors of front-end products compete for favorable spaces on display racks,
which we refer to as "pockets." Some vendors make incentive payments to
retailers for favorable pocket locations. These payments may include up-front
fees to have display racks configured to provide for a vendor's desired pocket
placements, recurring pocket rental fees based on the location and size or
rebate payments on a product's sales volume.
Timely delivery of information about retailer activity at the front-end,
including timing of reconfigurations, changes in display position or the
discontinuance of a vendor's products, is important to vendors of front-end
products. Timely delivery of information about price changes, special
promotions, new product introductions and other vendor plans is important to
retailers. We believe that there is an increasing demand on the part of
front-end product vendors for more frequent and detailed information on sales
and other front-end activity.
BUSINESS SEGMENTS
Our claims submission services for magazine retailers were established over 20
years ago. Our experience in providing these services is the foundation for our
other services. Set forth below are descriptions of our services and products in
each of our segments: services (26.4% of our fiscal 2001 revenues) and display
rack and store fixture manufacturing (73.6% of our fiscal 2001 revenues). See
Note 17 in our "Notes to Consolidated Financial Statements" for certain
financial information of each of our segments.
Services
Claim Submission Program. Through our information gathering capabilities, we
assist U.S. and Canadian retailers to accurately monitor, document, claim and
collect magazine publisher incentive and pocket rental payments. Incentive
payments consist of cash rebates offered to retailers by magazine publishers
equal to a percentage of magazine sales. Pocket rental payments are made by
magazine publishers for providing a specific pocket size and location on a
display rack. Our claim submission program relieves our retailer customers of
the substantial administrative burden of documenting their claims and we believe
increases the amount of claims they collect.
The claim submission process begins at the end of each calendar quarter. Local
distributors detail the titles and number of copies sold by our retailer clients
during that quarter. Display rack manufacturers and our retailer clients provide
us with information about magazine pocket placements. Based on this information,
we prepare claim forms and submit the documented claims to the appropriate
national distributor. After verification of the claim, the national distributor,
on behalf of the publisher, remits to us payment for the retailer. We then
record the payment and forward it to the retailer. We charge the retailer a
negotiated percentage of the amount collected.
Retailer customers who use our traditional claim submission program include
Fleming, Kroger, Southland 7-Eleven and Walgreens.
Advance Pay Program. As an extension of our claim submission program, we have
established our Advance Pay Program for magazine sales. Under this program, we
advance to participating retailers a negotiated fixed percentage of the total
quarterly incentive payments and pocket rental fees otherwise due the retailer.
We generally make these payments within 90 days after the end of the quarter. We
then collect the payments for our own account. This service provides the
retailer with improved cash flow and relief from the burdensome administrative
task of processing a large number of small checks from publishers. Payments
collected from publishers under the Advance Pay Program as a percentage of all
incentive payments collected from publishers grew from 30.4% during fiscal 1999
to 32.6% during fiscal 2000 to 47.4% during fiscal 2001.
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Our payments to the retailer precede our collections from the publisher. In
order to make these payments to retailers, we use funds generated from
operations and funds borrowed under our revolving credit facility. We generally
assume the risk of uncollectibility of the incentive and pocket rental payments.
Customers of our Advance Pay Program include A&P, Ahold USA, Food Lion, Kmart,
Target and W.H. Smith.
ICN, PIN and Store Level Data. In response to the business communications
opportunities presented by the Internet, we have developed our ICN website. The
ICN website enables subscribing magazine publishers to access information
regarding pricing, new titles, discontinued titles and display rack
configuration changes on a chain-by-chain basis. This information is important
to publishers because discontinuation and placement of their titles on the
display rack can have a significant impact on sales. We believe that, prior to
ICN, publishers could not react as quickly to these changes. Publishers also can
use ICN to promote special incentives and advertise and display special
editions, new publications and upcoming covers, all of which can increase their
sales. We have an agreement with Barnes & Noble, Inc. to jointly offer their
store-by-store daily sales data to magazine publishers. We also have an
agreement with Efficient Market Services (EMS), a privately held real-time
consumer-information company, to market and sell EMS's store-level, real-time
point-of-sale data. We believe the more timely, store-by-store information has
increased the attractiveness of our ICN website to publishers.
Retailers can use ICN to order new magazine titles and take advantage of
promotions by publishers. They also can download frequently changing price
information, including Uniform Product Codes, which change often because of
price changes and new title introductions.
The ICN website is configured so that publishers cannot access the strategically
sensitive information of other publishers and retailers. Retailers and
publishers can also exchange information and conduct transactions on the
Internet site without compromising their sensitive, proprietary information.
We market to magazine publishers our database of magazine-related industry
information (referred to as "PIN") that we gather through our claims submission
program. This information assists them in formulating their publishing and
distribution strategies. PIN subscribers have access to a historical database of
sales information for publications, as well as quarterly updates. PIN can
generate reports of total sales, sales by class of trade and sales by retailer.
Each report also provides other sales related information, including returns of
unsold magazines and total sales ranking. We believe that PIN is the most
extensive database available for single-copy retail magazine sales information.
Store Level Data provides publishers with daily insight into magazine sales
performance and information regarding their own titles' performance compared to
their competitors' sales performance on a daily, weekly or issue basis store by
store.
We receive annual fees, paid quarterly or monthly, from each publisher and
general merchandiser that subscribes to ICN, PIN or Store Level Data. For a fee,
publishers may advertise and run promotions and special programs on ICN. Since
ICN's launch in January 1999, we have signed up approximately 150 retailer
subscribers, including Ames Department Stores, Eckerd, Kmart, Southland
7-Eleven, W.H. Smith and Wegman's Food Markets, over 20 publishers, including
Comag, Murdoch Magazines, Time Distribution Services and Times Mirror, and five
general merchandisers including Hershey Food Corporation, Nestle USA and Rayovac
Corporation.
Front-End Management. We help retailers to increase sales and incentive payment
revenues by reconfiguring and designing front-end display racks, supervising
fixture installation, selecting products and negotiating, billing and collecting
incentive payments from vendors. We also help our retailer clients to develop
specialized marketing and promotional programs, which may include, for example,
special mainline or checkout displays and cross-promotions of magazines and
products of interest to the readers of these magazines.
To further enhance our front-end management service capabilities, we developed
our SourcePro software. SourcePro is a three dimensional fixture design system
that analyzes the retailer's store layout, customer traffic patterns and
available front-end merchandising alternatives to develop an appropriate
checkout display configuration.
Display Rack and Store Fixture Manufacturing
Front-End and Point-of-Purchase Displays. We design, manufacture, deliver and
dispose of custom front-end and point-of-
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purchase displays for both retail store chains and product manufacturers,
including Kmart, Food Lion, Kroger, Target, Home Depot and Hershey Food
Corporation. For many of our retail store accounts, we also invoice vendors for
rack costs and coordinate the collection of payments on these invoices. We
believe that manufacturing display racks increases our access to information
about sales of magazines and other products from retail checkout areas, which
enhances our ability to provide PIN and ICN.
Our manufacturing process typically begins when a retail store chain requests us
to design a display for its stores. We create a computer model of the display
based on the retailer's specifications, from which a prototype is created and
presented to the retailer for its examination. We then work together with the
retailer to finalize the design of the display and negotiate a price per
display. All of our front-end display racks are manufactured to customer
specifications.
We design, manufacture and powder-coat each pocket, shelf and other component of
a display unit separately and then assemble these components to create the
finished display. We believe that our component-oriented manufacturing process
enables us to produce our displays more quickly and efficiently and with a
higher standard of quality than if we used a unit-oriented process.
Materials used in manufacturing our racks include wire, metal tubing and
paneling. At our five manufacturing locations, we cut, shape, bend and weld
wire, tubing and metal paneling and paint and assemble the finished product. We
use a just-in-time inventory practice. This reduces our requirements to carry
inventories of raw materials, which in turn improves our cash flow.
Wooden Store Fixtures. In September 1999, we acquired Huck, a major manufacturer
and supplier of custom wood displays and fixtures to national retailers. Also,
in September, we acquired Arrowood, another manufacturer of wooden display
fixtures. These acquisitions enable us to meet demands for customized wooden
display fixtures from our major retail customers. This strategic broadening of
our base business provides access to new markets, solidifies existing
relationships, and further strengthens our leading position as the front-end
one-stop shop for retailers.
Current customers for wooden store fixtures include bookstore chains, discount
stores, department stores, convenience stores, pizza delivery stores and other
niche retailers. Our fixtures are primarily made from wood veneers or laminated
wood. Other raw materials used include paints and varnishes and hardware such as
hinges, drawer slides, aluminum and other metals to support and assemble the
wood product. Our production process includes cutting, machining, assembly and
finish. Virtually all product is shipped assembled ready to place in service at
a retailer's store.
All wooden store fixtures are custom made and as such we do not manufacture
product without a customer commitment for the product. Engineering and design
teams work closely with retailers to create product to meet specific
requirements. The process includes use of computer assisted drawings (CAD) and
"photo rendering" that allow a retailer to see an image of the product from
various angles and make changes. Once the CAD drawing is finalized, a prototype
is typically manufactured for approval prior to large scale manufacturing.
Products we make for retailers are check out counters, service desks, fitting
rooms, customized room kits, bookshelves, magazine racks and other merchandise
display fixtures.
To meet seasonal demands for product, customers will typically provide
commitments well in advance of needing the product in its stores so that enough
product is available for shipment when needed. As such, our inventory levels
increase during seasonal periods when customers are not opening or remodeling
stores, typically November through April. Inventory levels decrease during
periods when the majority of store openings and remodelings occur, typically
July through October.
Magazine Distribution
In March 2001, we signed a letter of intent to acquire The InterLink Companies,
Inc. ("InterLink") and its operating companies, including International
Periodical Distributors, Inc. ("IPD"), a leading direct distributor of
magazines, and DEYCO, a specialty national magazine distributor. Previously,
during February 2001, we acquired 15% ownership of InterLink. The acquisition
will provide us with exclusive access to magazine sales data that will expand
the daily, store level sales information available on our on-line information
database.
IPD is the leading national and international direct distributor of magazines to
major book chains and independent retailers, distributing more than 6,000
magazine titles to over 5,000 retail outlets. IPD offers mass-market retailers a
viable alternative from the traditional magazine distribution system. Under
IPD's direct distribution system, magazines are delivered using
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common carriers, such as UPS, to service customers on a national basis whereas
traditional distribution systems service customers via geographic territories. A
partial list of the prestigious customers serviced by IPD includes Barnes &
Noble, B. Dalton Book Sellers, Borders, Waldenbooks, Babbages, Hastings Book,
Music & Video and Tower Magazines/MTS, Inc.
IPD's access to ICN and Source's retailer relationships should allow for very
exciting growth in its distribution business. As a result of enhanced
efficiencies and its ability to quickly execute distribution changes resulting
from the analyses of sales information, IPD has achieved an overall sell-through
of 54% compared to the industry average of only 38%. Over $7 billion of
magazines, at retail, are returned each year, emphasizing the importance of
increasing sell-through percentages. In addition, single copy sales of magazines
at retail represent $4.5 billion, annually. We believe the unique ability to
cross-sell the various services we offer strengthens Source's position as the
pre-eminent leader in the multi-billion dollar front-end checkout market.
MAJOR CUSTOMERS
For fiscal 2001, two customers accounted for approximately 29% of revenues.
Borders accounted for approximately 15% of revenues and Kmart accounted for
approximately 14% of revenues. For fiscal 2000, two customers accounted for
approximately 26% of revenues. Winn Dixie accounted for approximately 15% of
revenues and Ahold USA accounted for approximately 11% of revenues. For fiscal
1999, three customers accounted for approximately 38% of revenues. One of the
three customers, Food Lion, Inc., accounted for approximately 27% of revenues.
With the exception of Borders, for which we manufacture custom wood displays and
fixtures, our major customers are usually retailers in the process of
reconfiguring their checkout areas. Because this process typically occurs every
three years, our major customers vary from year to year.
MARKETING AND SALES
We market our services and display fixtures through our own direct sales force.
Our sales group consists of five divisional vice presidents and 15 regional
managers. We have integrated our marketing efforts for our traditional
information and management services with our display rack manufacturing. We
market our services primarily through direct contact with clients and
prospective clients. We also market our services at industry trade shows and
through trade publications.
Each of our managers is assigned to a specific geographic territory and is
responsible for the preparation of quotations, program presentations and the
general development of sales, as well as maintenance of existing accounts,
within his or her territory. Our regional managers maintain frequent contact
with our clients in order to provide them with a high level of service and react
quickly to their needs.
COMPETITION
We face significant competition for many of our services. For example, we have a
substantial number of direct competitors for our claims submission program, all
of which are closely-held private companies. We also compete with five other
manufacturers for front-end display rack manufacturing business. There also are
a substantial number of competitors for our point-of-purchase rack business,
many of which are national in scope. Any of these competitors could also compete
for our front-end display fixture business.
In addition, some of our information and management services may be performed
directly by our retailer customers or by vendors, distributors or other
information service providers. Other organizations, including ACNielsen,
Information Resources and Audit Bureau of Circulations, also collect sales data
from retail stores. While none of these organizations currently compete with us,
any one of them could do so. If any of them were to compete with us, given their
experience in collecting information and their industry reputation, they could
be a formidable competitor.
Our competitors also may introduce services that are perceived by our clients to
be more attractive than those we provide. In addition, many of our current and
possible competitors have substantially greater financial resources than we do.
We believe that the principal competitive factors in the retail information
industry include access to information, technological support, accuracy, system
flexibility, financial stability, customer service and reputation. In addition
to financial stability, customer service and reputation, we believe that product
quality, timeliness of delivery and, to a lesser extent, price are competitive
factors in the display rack manufacturing business. We believe we compete
effectively with respect to each of the above factors.
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Competitive pressures may result in a decrease in the number of clients we serve
and a decrease in our revenues. Either of these could materially harm our
business, financial condition and future results.
INFORMATION SYSTEMS; INTELLECTUAL PROPERTY
Software used in connection with our claims submission program and in connection
with PIN and ICN, as well as our SourcePro software, was developed specifically
for our use by a combination of in-house software engineers and outside
consultants. We believe that certain elements of all three of these software
systems are proprietary to The Source. Other portions of these systems are
licensed from the third party, MJ Systems, that helped to design the system. We
also receive systems service and upgrades under the license.
We have filed applications with the U.S. Patent Office for patent protection for
our ICN, SourcePro and PIN innovations. Certain aspects of our ICN, SourcePro
and PIN innovations also have copyright protection.
EMPLOYEES
As of March 31, 2001, we employed approximately 850 persons. Of the employees at
our Brooklyn, New York facility, 141 are represented by Local 810 of the Steel,
Metal, Alloys and Hardware Fabricators of the International Brotherhood of
Teamsters under a collective bargaining agreement expiring on September 30,
2004. Of the employees at our Philadelphia, Pennsylvania facility, 68 are
represented by Local 837 of the Teamsters Union under a collective bargaining
agreement expiring on December 31, 2005. We consider our employee relations to
be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
We conduct our business from over twenty manufacturing, data processing, office
and warehouse facilities. All of our manufacturing and warehouse facilities are
used by our display rack and store fixture manufacturing segment. Our office
facilities are shared by our manufacturing and services segments.
LOCATION DESCRIPTION SIZE SQ. FT. OWNED/LEASED
---------------- ------------------- ------------ -------------
St. Louis, MO Office 5,100 Leased
Manhattan, NY Office 3,500 Leased
High Point, NC Data Processing/Office 24,000 Owned
Don Mills, Ontario Office 3,900 Leased
Rockford, IL Manufacturing/Office 310,500 Owned
Jacksonville, FL Manufacturing/Office 55,000 Leased
Brooklyn, NY Manufacturing/Office 92,000 Leased
Philadelphia, PA Manufacturing/Office 110,000 Owned
Vancouver, British Columbia Manufacturing/Office 20,000 Leased
Quincy, IL Manufacturing/Office 260,000 Owned
Carson City, NV Manufacturing/Office 135,000 Owned
Norwood, NC Manufacturing/Office 52,000 Leased
In addition, we have warehouse facilities in Florida and New Jersey and small
offices in Pennsylvania, Ohio, Oklahoma, California, Washington, Arkansas,
Massachusetts, Wisconsin, Alberta and Ontario. We believe our facilities are
adequate for our current level of operations and that all of our facilities are
adequately insured.
ITEM 3. LEGAL PROCEEDINGS.
We are from time to time parties to various legal proceedings arising out of our
businesses. We believe that there are no proceedings pending or threatened
against us which, if determined adversely, would have a material adverse effect
on our business, financial condition, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders in the quarter
ended January 31, 2001.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is quoted on the Nasdaq National Market under the symbol
"SORC." The following table sets forth, for the periods indicated, the high and
low closing sale prices for the Common Stock as reported on the Nasdaq National
Market.
Fiscal 2000 High Low
- - ----------- ---- ---
First Quarter $14.00 $9.75
Second Quarter $17.38 $10.75
Third Quarter $15.88 $11.00
Fourth Quarter $17.13 $10.44
Fiscal 2001 High Low
- - ----------- ---- ---
First Quarter $22.81 $14.00
Second Quarter $15.25 $10.69
Third Quarter $11.06 $4.97
Fourth Quarter $7.13 $3.66
As of April 25, 2001, there were approximately 100 holders of record of the
Common Stock.
We have never paid dividends on our Common Stock. The Board of Directors
presently intends to retain all of its earnings, if any, for the development of
our business for the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of our Board of Directors and
will depend upon a number of factors, including among others, future earnings,
operations, capital requirements, the general financial condition of the Company
and such other factors that the Board of Directors may deem relevant. Currently,
the credit agreement with Bank of America, N.A., limits the payment of cash
dividends or other distributions on capital stock or payments in connection with
the purchase, redemption, retirement or acquisition of capital stock.
SALES OF UNREGISTERED SHARES
In March, 2000 and June, 2000, Cameron Capital exercised warrants to purchase an
aggregate of 300,000 shares of our common stock at $3.00 per share. The warrants
were issued to Cameron in July, 1997 as partial consideration for Cameron's
exchange of shares of our preferred stock for shares of our common stock.
Cameron provided us with appropriate investment representations and the
certificates for the shares bear appropriate restrictive legends. We believe the
issuance of these shares was exempt from the registration requirements of the
Securities Act of 1933 (the "Act") pursuant to Section 4(2) thereof. 150,000 of
these shares have since been registered under the Act on Form S-3 for resale by
Cameron.
In March, 2000, Herbert Hardt exercised warrants to purchase 150,000 shares of
our common stock at $10.00 per share. The warrants were granted to Mr. Hardt in
August, 1998 as consideration for consulting services. Mr. Hardt represented to
us in writing that he was acquiring the shares for investment and agreed that
they could not be sold or otherwise transferred unless they were first
registered under the Act except in a transaction which is exempt from the
registration requirement. These shares have since been registered on Form S-3
for resale by Mr. Hardt. We believe the issuance of these shares was exempt from
the registration requirements of the Act pursuant to Section 4(2) thereof.
Between April, 2000 and January, 2001, we issued an aggregate of 373,382 shares
of our common stock to the former shareholders of manufacturers that we acquired
to satisfy earnout provisions in the Acquisition Agreements. Approximately
38,000 of these shares have since been registered for resale on Form S-3. Each
of the shareholders represented to us in writing in the original Acquisition
Agreements that he or she was acquiring the shares for investment and agreed
that the shares could not be sold or otherwise transferred unless they were
first registered under the Act except in a transaction which is exempt from the
registration requirement. The certificates for the shares bear appropriate
restrictive legends. We believe that the issuance of these shares was exempt
from the registration requirements of the Act pursuant to Section 4(2) thereof.
The shares were issued as follows:
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12,987 shares to the former shareholder of Yeager Industries, Inc,
valued at the time of issuance at $196,000.;
130,000 shares to the former shareholders of Chestnut Display
Systems, Inc., valued at the time of issuance at $876,000;
100,000 shares to the former shareholder of MYCO, Inc., valued at
the time of issuance at $536,000; and
130,395 shares to the former shareholders of Huck Store Fixture
Company, valued at the time of issuance at $498,000.
In August, 2000, Harry Franc and Aron Katzman exercised warrants to purchase
8,929 shares and 40,180 shares, respectively, of our common stock for $3.00 per
share. The warrants were issued in September, 1997 to Messrs. Franc and Katzman,
who are directors of the Company. Messrs. Franc and Katzman represented to us in
writing that these shares were being acquired for investment, and not for resale
and the certificates bear appropriate restrictive legends. We believe the
issuance of these shares was exempt from the registration requirements of the
Act pursuant to Section 4(2) thereof.
In December, 2000, we issued 40,000 shares to the former owners of Vail
Companies, Inc. in consideration for the cancellation of promissory notes with
unpaid principal balances of $180,000. The notes were issued in connection with
the acquisition of Vail by Brand Manufacturing Corp., which was subsequently
acquired by us. The Vail owners represented to us in writing that these shares
were being acquired for investment, and not for resale and the certificates bear
appropriate restrictive legends. We believe the issuance of these shares was
exempt from the registration requirements of the Act pursuant to Section 4(2)
thereof.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended January 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands, except for per share data)
STATEMENT OF OPERATIONS INFORMATION:
Service revenues $ 7,298 $ 11,804 $ 14,229 $ 18,249 $ 24,238
Product sales - - 6,871 64,239 67,510
--------- --------- --------- ---------- -----------
Total revenues 7,298 11,804 21,100 82,488 91,748
--------- --------- --------- ---------- -----------
Cost of service revenues 5,064 5,861 6,659 9,305 11,152
Cost of goods sold - - 4,609 39,564 48,678
--------- --------- --------- ---------- -----------
Total costs of revenues 5,064 5,861 11,268 48,869 59,830
Gross profit 2,234 5,934 9,832 33,619 31,918
Selling, general and administrative expense 2,904 2,351 2,949 14,880 20,032
--------- --------- --------- ---------- -----------
Operating income (loss) (670) 3,592 6,883 18,739 11,886
Interest expense (312) (714) (331) (1,033) (2,356)
Interest income 31 21 28 114 44
Other income (expense) (29) (79) (47) (152) 36
--------- --------- --------- ---------- -----------
Income (loss) before income taxes (980) 2,820 6,533 17,668 9,610
Income tax (provision) benefit 377 (1,231) (2,667) (7,557) (3,776)
--------- --------- --------- ---------- -----------
Net income (loss) $ (603) $ 1,589 $ 3,866 $ 10,111 $ 5,834
========= ========= ========= ========== ===========
Earnings (loss) per share
Basic $ (0.11) $ 0.23 $ 0.42 $ 0.66 $ .33
Diluted (0.11) 0.22 0.40 0.60 .32
Weighted average outstanding shares
Basic 5,557 6,562 9,132 15,332 17,591
Diluted 5,557 6,694 9,776 16,815 18,303
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At January 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET INFORMATION:
Working capital $ 2,323 $ 16,988 $ 22,014 $ 61,455 $ 62,288
Total assets 15,570 23,808 65,878 156,759 157,108
Total debt 7,216 8,635 3,508 32,389 31,896
Redeemable stock 1,026 - - - -
Stockholders' equity 3,146 12,495 52,310 107,414 111,801
For a discussion on acquisitions that affect comparability of results, see Note
5 in the "Notes to the Consolidated Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We derive our revenues from (1) providing information and management services
relating to retail magazine sales to U.S. and Canadian retailers and magazine
publishers and confectioners and vendors of gum and general merchandise sold at
checkout counters and (2) manufacturing display racks and store fixtures used by
retailers at checkout counters and other areas of their stores.
Fees earned in connection with the collection of incentive payments under our
Traditional Claim Submission and Advance Pay Programs continue to be significant
contributors to our service revenues. Payments collected from publishers under
the Advance Pay Program as a percentage of all incentive payments collected from
publishers grew from 30.4% during fiscal 1999 to 32.6% during fiscal 2000 and
47.4% in fiscal 2001. Most incentive payment programs offer the retailer a cash
rebate, equal to a percentage of the retailer's net sales of the publisher's
titles, which is payable quarterly upon submission of a properly documented
claim. Under our Traditional Claim Submission Program, we submit claims for
incentive payments on behalf of the retailer and receive a fee based on the
amounts collected. Under the Advance Pay Program, we advance participating
retailers a negotiated fixed percentage of total quarterly incentive payments
and pocket rental fees and then collect the payments from the publishers for our
own account.
Under both the Traditional Claim Submission Program and the Advance Pay Program,
service revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers. Our allowance for
doubtful accounts is approximately 2% of accounts receivable. We believe this
amount will be adequate to satisfy losses from uncollectible accounts
receivable. Under the Advance Pay Program, the revenues we recognize represent
the difference between the amount advanced to the retailer customer and the
amount claimed against the publisher.
ICN, PIN and store level data revenues consist of subscription fees. Subscribers
pay for their subscriptions on a quarterly basis for ICN and PIN and on a
monthly basis for store level data. Subscriptions have an initial term of one
year and are automatically renewed for successive one-year terms unless earlier
terminated. Revenues are recognized ratably over the subscription term. We also
receive fees from publishers for advertising, promotions and special programs on
ICN.
Front-end management includes configuring and designing front-end display racks,
supervising installation and collecting incentive payments from vendors for
product placement. Front-end management revenues are recognized as services are
performed.
Since January 1999, we acquired five manufacturers of front-end and
free-standing point-of-purchase display racks and two manufacturers of wooden
store fixtures. Manufacturing display racks and store fixtures in our own
facilities allows us to be a full-service provider of management services for
the front-end of a customer's store.
We generally recognize manufacturing revenues as products are shipped to
customers. When we receive payment prior to shipment, we record the amount as a
liability and recognize the amount as revenues when products are shipped. Upon
request from a customer, the product can be stored for future delivery for the
convenience of the customer. In this case revenue is
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recognized when the manufacturing and earnings processes are complete, the
customer accepts title in writing, the product is invoiced with payment due in
the normal course of business, the delivery schedule is fixed and the products
are segregated from other goods. In our display rack and store fixture
manufacturing segment, we also receive trucking revenues for transporting racks
and warehousing revenues for storing racks. We generally recognize trucking
revenues as shipments are completed. Warehousing revenues are recognized when
services are rendered.
Cost of revenues generally includes personnel costs, including in some cases the
cost of independent contractors. For manufacturing, cost of revenues also
includes the cost of materials and supplies directly used in the completion of
display racks and store fixtures as well as manufacturing overhead costs which
include indirect material, indirect labor, and such items as depreciation,
taxes, insurance, heat and electricity incurred in the manufacturing process.
Cost of service revenues is an allocation of operating costs and is not
separately analyzed by management primarily because operating costs do not vary
significantly with revenues.
Selling, general and administrative expense includes corporate overhead, project
management, management information systems, executive compensation, human
resource expenses and finance expenses.
Manufacturing has accounted for a substantial increase in our cost of revenues
due to both the cost of materials and supplies used in manufacturing and
substantially increased personnel costs relating to our manufacturing
facilities. Selling, general and administrative expenses also increased
substantially due to the increased scope of our operations.
See Note 17 in the "Notes to Consolidated Financial Statements" for certain
financial information on our two business segments, which are services and
display rack and store fixture manufacturing.
RECENT ACQUISITIONS
Since January 7, 1999, we acquired the following companies. Each of the
acquisitions was accounted for as a purchase.
- SOURCE-U.S. MARKETING SERVICES, INC. U.S. Marketing is the parent of
Brand Manufacturing Corporation, a manufacturer of front-end display
racks with manufacturing facilities in Brooklyn, New York and a
warehouse and distribution facility in New Jersey. Through its
affiliates, Brand also provides trucking and freight services and
removes and disposes of display racks no longer required by our
customers. We acquired the stock of U.S. Marketing in January 1999 for
1,926,719 shares of our common stock and 1,473,281 shares of our Class A
Convertible Preferred Stock, valued at the time of the acquisition at
$26.3 million in total. The Class A Convertible Preferred Stock was
converted into an equal number of shares of common stock on March 30,
1999.
- SOURCE-YEAGER INDUSTRIES, INC. Yeager manufactures front-end display
racks from facilities in Philadelphia, Pennsylvania. We purchased the
assets of Yeager Industries, Inc. and assumed its operating liabilities
in January 1999 for $2.3 million in cash and 164,289 shares of our
common stock, valued at the time of the acquisition at $1.2 million. The
purchase price could have been increased by up to $500,000 (the
"Earnout"), depending upon Yeager's performance during fiscal 2000 and
2001. In April 2000, the parties terminated the Earnout provision and we
issued to Yeager 12,987 shares of our common stock.
- SOURCE-MYCO, INC. MYCO is a Rockford, Illinois manufacturer of front-end
display racks. We purchased the assets and assumed the operating
liabilities of MYCO, Inc. in February 1999 for $12.0 million in cash and
134,615 shares of our common stock, valued at the time of the
acquisition at $875,000. We also assumed MYCO Inc.'s industrial revenue
bond indebtedness of $4.0 million and repaid MYCO, Inc's indebtedness of
$1.5 million. The purchase price was increased by an additional 100,000
shares of our common stock issued in October 2000 based on MYCO's
performance in the twelve months following the acquisition.
- SOURCE-CHESTNUT DISPLAY SYSTEMS, INC. Chestnut manufactures front-end
display racks from its facility in Jacksonville, Florida. We purchased
the assets and assumed the operating liabilities of Chestnut Display
Systems, Inc. and its affiliate, Chestnut Display Systems (North), Inc.
in February 1999 for $3.6 million in cash and 285,714 shares of our
common stock, valued at the time of the acquisition at $1.8 million. The
purchase price was increased by an additional 130,000 shares of our
common stock issued in August 2000 and November 2000 based upon Chestnut
meeting certain performance goals during fiscal 2000 and 2001.
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- PROMARK. We purchased the assets and assumed the operating liabilities
of 132127 Canada Inc., known as ProMark, in March 1999. Headquartered in
Toronto, this operation provides rebate and information services to
retail customers throughout Canada and strengthens our ability to obtain
information about retail sales from checkout areas in Canada. We paid a
cash purchase price of Cdn$1.5 million for ProMark.
- AARON WIRE AND METAL PRODUCTS, LTD. Aaron Wire manufactures front-end
display racks from its facilities in Vancouver, British Columbia. In July
1999, we acquired the stock of Aaron Wire for approximately Cdn$2.4
million.
- SOURCE-HUCK STORE FIXTURE COMPANY. Huck manufactures wooden store
fixtures from its facilities in Quincy, Illinois and Carson City, Nevada.
In September 1999, we purchased the assets and assumed certain operating
liabilities of Huck Store Fixture Company for $3.0 million in cash and
100,000 shares of our common stock, valued at the time of acquisition at
approximately $1.5 million. We also repaid Huck Store Fixture Company's
indebtedness of approximately $6.8 million. The sellers received a second
payment, based on performance, which was calculated and paid in January
2000 in the amount of $6.8 million in cash and 267,883 shares of our
common stock, valued at the time of issuance at $3.8 million. In January
2001 an additional payment of approximately $3.5 million in cash and
130,395 shares of our common stock was made to the sellers based on
Huck's performance for its year ended November 4, 2000.
- HUCK STORE FIXTURE COMPANY OF NORTH CAROLINA. In September 1999, our
subsidiary, Huck Store Fixture Company of North Carolina, acquired the
net assets of Arrowood, Inc. for $939,000 in cash and two separate notes
for a total of $380,000. This company manufactures wooden store fixtures
from its facility in Norwood, North Carolina. Huck Store Fixture Company
had entered into a letter of intent to purchase Arrowood prior to our
acquisition of Huck.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, information relating
to our operations expressed as a percentage of Total Revenues:
Fiscal Year Ended January 31,
------------------------------------------
2001 2000 1999
---- ---- ----
Service Revenues 26.4% 22.1% 67.4%
Product Sales 73.6% 77.9% 32.6%
----- ----- -----
Total Revenues 100.0% 100.0% 100.0%
Cost of Service Revenues 12.2% 11.3% 31.6%
Cost of Goods Sold 53.0% 48.0% 21.8%
----- ----- -----
Gross Profit 34.8% 40.7% 46.6%
Selling, General and Administrative Expense 21.8% 18.0% 14.0%
----- ----- -----
Operating Income 13.0% 22.7% 32.6%
Interest, Net (2.5)% (1.1)% (1.4)%
Other Income (Expense), Net - % (0.2)% (0.2)%
----- ----- -----
Income Before Income Taxes 10.5% 21.4% 31.0%
----- ----- -----
Net Income 6.4% 12.3% 18.3%
===== ===== =====
FISCAL 2001 COMPARED TO FISCAL 2000
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN/ICN and front-end management, accounted for approximately 26.4%
and 22.1% of our revenues for fiscal 2001 and 2000, respectively. Service
revenues of $24.2 million in fiscal 2001 increased $6.0 compared to fiscal 2000
as a result of an increase in ICN related revenues (a significant amount of
which was non-recurring) and expansion of the Advance Pay Program. Most of the
anticipated ICN related revenue will be from agreements which contain revenue
sharing elements which require us to pay a certain portion of such revenues to
third parties which provide data to us. However, most of the ICN related revenue
recognized to date had no revenue sharing element associated with it.
Approximately $100,000 has been paid to third parties under revenue sharing
agreements.
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Product Sales. In February, 1999, we acquired Chestnut and MYCO. In July, 1999,
we acquired Aaron Wire and in September, 1999, we acquired Huck and Arrowood.
Results of operations for all companies have been included in our consolidated
financial statements since their respective dates of acquisition. Manufacturing
display racks and store fixtures accounted for approximately 73.6% and 77.9% of
our revenues for fiscal 2001 and 2000, respectively. Product sales of $67.5
million in fiscal 2001 increased $3.3 million compared to fiscal 2000. The
acquisitions of Aaron Wire, Huck and Arrowood contributed to an increase of
$15.0 million over fiscal 2000. The other manufacturers experienced a decrease
in sales of $11.7 primarily related to volume and, to a small degree, pricing.
Volume was impacted by customer postponements. Although we enjoy a significant
market share which we believe in excess of 60%, we have experienced a limited
degree of pricing pressure.
Gross Profit. Gross profit decreased to $31.9 million in fiscal 2001 from $33.6
million in fiscal 2000, a decrease of approximately $1.7 million. The increase
in gross profit for services was $4.1 million, a significant amount of which was
non-recurring. The gross profit for manufacturing decreased $5.8 million. The
manufacturing gross margin decreased from 38.4% to 27.9% resulting from lower
margins associated with Huck and Arrowood, neither of which were included in the
first eight months of the prior year, and from lower volume and pricing pressure
experienced during the third and fourth quarters of this year.
Selling, General and Administrative Expense. Selling, general and administrative
("SG&A") expense includes one-time charges, incurred in third quarter of fiscal
2001, of $4.1 million to write-off accounts receivable. The majority of the
write-offs related to the manufacturing segment. Excluding these one-time
charges, SG&A expense increased to $16.0 million in fiscal 2001 from $14.9
million in fiscal 2000, an increase of $1.1 million, of which Huck's increased
expenses were $0.9 million. The $0.9 million increase was merely the result of
the inclusion of Huck's operating results for a full year in fiscal 2001 versus
four months in fiscal 2000. SG&A expense, excluding the one-time charges,
decreased as a percentage of revenues from 18.0% in fiscal 2000 to 17.4% in
fiscal 2001.
Interest Expense. Interest expense for fiscal 2001 increased $1.3 million
compared to fiscal 2000 principally due to the increase in the average balance
outstanding on our credit facility from approximately $9.6 million during the
year ended January 31, 2000 to $26.8 million for the year ended January 31,
2001.
Income Tax Expense. The effective income tax rates for fiscal years 2001 and
2000 were 39.3% and 42.8%, respectively. These rates varied from the federal
statutory rate due to state income taxes and expenses not deductible for income
tax purposes. These non-deductible expenses include goodwill amortization, meals
and entertainment and officers' life insurance premiums.
FISCAL 2000 COMPARED TO FISCAL 1999
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN/ICN and front-end management, accounted for approximately 22.1%
and 67.4% of our revenues for fiscal 2000 and fiscal 1999, respectively. Service
revenues of $18.2 million in fiscal 2000 increased $4.0, or 28.2%, compared to
fiscal 1999 as a result of an increase in front-end management revenues and the
acquisition in March 1999 of ProMark.
Product Sales. In January, 1999, we acquired Yeager and U.S. Marketing. In
February, 1999, we acquired Chestnut and MYCO. In July, 1999, we acquired Aaron
Wire and in September, 1999, we acquired Huck and Arrowood. Results of
operations for all companies have been included in our consolidated financial
statements since their respective dates of acquisition. Manufacturing display
racks and store fixtures accounted for approximately 77.9% and 32.6% of our
revenues for fiscal 2000 and fiscal 1999, respectively. Product sales were $64.2
and $6.9 million, respectively, in fiscal 2000 and 1999.
Gross Profit. Gross profit increased to $33.6 million in fiscal 2000 from $9.8
million in fiscal 1999, an increase of approximately $23.8 million. All of the
increase in gross profit was due to our recently acquired manufacturing
subsidiaries. Gross margin of the services segment decreased from 53.2% in
fiscal 1999 to 49.0% in fiscal 2000. Cost of service revenues includes all costs
dedicated to generating service revenues as well as an allocation of the
non-dedicated costs, which include administrative costs. ProMark's gross profit
contribution caused the gross profit percentage to decrease 1.4 percentage
points. ProMark is a wholly-owned Canadian subsidiary acquired in March 1999
which has continued to operate relatively autonomously. The remaining 2.8
percentage point decline was due to a $500,000 increase in dedicated costs. This
increase was due to dedicated costs associated with the accumulation of
store-level magazine sales data and ICN in general. In addition, growth in wage
rates contributed to the $500,000 increase in dedicated costs.
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Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $14.9 million in fiscal 2000 from $2.9 million in fiscal
1999, an increase of $11.9 million. Of the total increase, approximately $8.6
million was attributable to the recently acquired manufacturing subsidiaries.
The remaining $3.2 million increase was attributable to general corporate
expenses. Selling, general and administrative expense as a percentage of
revenues increased from 14.0% in fiscal 1999 to 18.0% in fiscal 2000.
Interest Expense. Interest expense for fiscal 2000 increased $702,000 compared
to fiscal 1999 principally due to the increased borrowings used to fund the
manufacturing acquisitions and the assumption of the $4 million in industrial
revenue bonds in connection with the MYCO acquisition.
Income Tax Expense. The effective income tax rates for fiscal years 2000 and
1999 were 42.8% and 40.8%, respectively. These rates varied from the federal
statutory rate due to state income taxes and expenses not deductible for income
tax purposes. These non-deductible expenses include goodwill amortization, meals
and entertainment and officers' life insurance premiums.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the services segment are for funding the
Advance Pay Program and for meeting general working capital requirements. Our
primary cash requirements for the display rack and store fixture manufacturing
segment are for purchasing materials and the cost of labor incurred in the
manufacturing process. Historically, we have financed our business activities
through cash flows from operations, borrowings under available lines of credit
and through the issuance of equity securities.
During fiscal 2001, 2000 and 1999, we advanced approximately $84.8 million,
$68.9 million and $59.8 million, respectively, under the Advance Pay Program.
These advances grew by 23.1% from fiscal 2000 to fiscal 2001 and 15.2% from
fiscal 1999 to fiscal 2000. Generally, the primary source of funding the
advances is our credit facility, which is discussed below. During fiscal 2001,
the Program was funded by borrowings under the revolving credit facility and
cash flows from operations. Collections under the Advance Pay Program are used
to pay down any outstanding balance under the credit facility. Thus, the credit
facility is primarily used to manage the timing of payments and collections
under the Advance Pay Program. Growth of the Advance Pay Program will be
monitored and controlled to ensure that funding will be available either through
cash provided by operations or borrowings under our credit facility.
Net cash provided by operating activities of $8.7 million for fiscal 2001 was
primarily from net income, non cash items of depreciation and amortization and
the decrease in inventories offset by the decrease in accounts payable and
accrued expenses and the increase in other assets. Net cash used by operating
activities of $16.4 million for fiscal 2000 was primarily from the increase in
accounts receivable, increase in other assets and decrease in accounts payable
and accrued expenses offset by net income and non cash items of depreciation and
amortization. Net cash provided by operating activities of $590,000 for fiscal
1999 was primarily from net income enhanced by a decrease in inventories and
other assets, partially offset by an increase in accounts receivable. The
average collection period for 2001 was approximately 169 days (considered to be
within an acceptable range by management based on the nature of our business and
historical experience). The collection period cannot be calculated by examining
our financial statements because reported revenue associated with the Advance
Pay Program includes only the difference between what we advance the retailer
and what is due from the publisher. The receivable equals the amount due from
the publisher, not the amount of revenue recorded. If the revenues were reported
in a manner consistent with the recording of the receivables, revenues would
have been approximately $84.8 million higher than reported, or approximately
$176.5 million. Dividing the average accounts receivable into $176.5 million
results in an average collection period of approximately 169 days.
Net cash used in investing activities was $8.8 million, $42.1 million and $5.5
million in fiscal year 2001, 2000 and 1999, respectively. The increase from
fiscal 1999 to fiscal 2000 was primarily due to the acquisitions in fiscal 2000.
Net cash used in financing activities was $0.5 million in fiscal 2001 compared
to net cash provided by financing activities of $ $59.4 million and $5.6 million
in fiscal year 2000 and 1999. The decrease in fiscal 2001 from fiscal 2000 is
primarily due to the reacquisition of our common stock. The increase in fiscal
2000 is due to the public offering in July 1999 and an increase in the balance
on the revolving credit facility.
At January 31, 2001, we did not have any commitments for capital expenditures.
Currently, we do not anticipate any significant capital expenditures during
fiscal 2002.
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At January 31, 2001, we had total deferred tax assets of $1.8 million and total
deferred tax liabilities of $2.6 million, resulting in a net deferred tax
liability of $800,000. This liability was due to the net tax effects of
temporary differences between the carrying amount of the assets and liabilities
for financial reporting purposes and the amounts used for income tax reporting.
We intend to obtain the funds necessary to satisfy this tax obligation from cash
flows from operations.
The balance outstanding under the revolving credit facility at January 31, 2001
and 2000 was approximately $27.8 million and $27.9 million, respectively. The
balance on the revolving credit facility decreased approximately $140,000
despite cash outflows of $3.5 million for acquisitions, $2.5 million for capital
expenditures, $3.5 million for investments and $2.6 million for reacquisition of
our common stock net of proceeds from issuances of stock.
At January 31, 2001, our total long-term debt obligations were approximately
$31.8 million. In December 1999, we entered into an unsecured credit agreement
with Bank of America, N.A. to provide for a $50.0 million revolving credit
facility. The revolving credit facility bears interest at a rate equal to the
London Interbank Offered Rate plus a percentage ranging from 1.0% to 2.1%
depending on our ratio of funded debt to earnings before interest, taxes,
depreciation and amortization and carries a facility fee of 1/4 % per annum on
the difference between $25 million and the average principal amount outstanding
under the loan (if less than $25 million) plus 3/8% per annum of the difference
between the maximum amount of the loan and the greater of (i) $25 million or
(ii) the average principal amount outstanding under this loan. The revolving
credit facility terminates December 31, 2002.
Under the Credit Agreement, we are subject to various financial and operating
covenants. These include (i) requirements that we satisfy various financial
ratios and (ii) limitations on the payment of cash dividends or other
distributions on capital stock or payments in connection with the purchase,
redemption, retirement or acquisition of capital stock.
In connection with the acquisition of MYCO, Inc., the Company assumed MYCO's
Industrial Revenue Bonds (IRB). On January 30, 1995, the City of Rockford issued
$4 million of its Industrial Project Revenue Bonds, Series 1995, and the
proceeds were deposited with the Amalgamated Bank of Chicago, as trustee. Bank
of America ("the Bank") has issued an unsecured letter of credit for $4.1
million in connection with the IRB with an initial expiration date of April 20,
2001. As provided in the reimbursement agreement, the expiration date shall
automatically extend for successive additional periods of one calendar month
until the twentieth day of the thirteenth month following receipt of a notice of
non-extension from the Bank. To date, no such notice of non-extension has been
received and management does not expect such notice to be given by the Bank in
the foreseeable future. The bonds are secured by the trustee's indenture and the
$4.1 million letter of credit. The bonds bear interest at a variable weekly rate
(approximately 80% of the Treasury Rate) not to exceed 15% per annum. The bonds
mature on January 1, 2030. Fees related to the letter of credit are .75% per
annum of the outstanding bond principal plus accrued interest.
In June 1999, we purchased our facility in High Point, North Carolina for $1.8
million. We financed this purchase through available borrowings under our
revolving credit facility.
We believe that our cash flow from operations together with our revolving credit
facility will be sufficient to fund our working capital needs and capital
expenditures for the foreseeable future.
On March 5, 2001 the Company signed a letter of intent to acquire 100% of
InterLink and its operating companies, including International Periodical
Distributors, Inc., a direct distributor of magazines, and DEYCO, a specialty
national magazine distributor, for $1,200,000 in cash and 1,220,000 shares of
the Company's common stock. Previously, on February 22, 2001, the Company had
acquired 15% of InterLink's outstanding common shares and 294,497 shares of
InterLink's Series B Convertible Preferred Stock for $6,330,000. Additionally,
the Company loaned InterLink $4,170,000 in the form of a convertible note.
InterLink may repay the note at any time until February 22, 2010, at which time
the note will be automatically converted into 88,349 shares of common stock. The
Company has the right to convert the note at any time after February 22, 2007
into 88,349 shares of common stock. The note bears interest at 8.4% per annum,
payable quarterly.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. The
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Company adopted SFAS No. 133 on February 1, 2000 and there was no material
impact on the results of operations, financial position or cash flows.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," providing the staff's views in
applying accounting principles generally accepted in the United States to
certain revenue recognition issues. The Company adopted SAB No. 101, as amended,
in the fourth quarter of fiscal 2001 and there was no material effect on the
Company's consolidated financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risks include fluctuations in interest rates and
exchange rate variability. Substantially all of the Company's debt relates to a
three-year credit agreement with an outstanding principal balance of
approximately $27.8 million as of January 31, 2001. Interest on the outstanding
balance is charged based on a variable interest rate related to LIBOR plus a
margin specified in the credit agreement, and is subject to market risk in the
form of fluctuations in interest rates.
The Company also conducts operations in Canada. For the year ended January 31,
2001, approximately 3.6% of our revenues were earned in Canada and collected in
local currency. In addition, we generally pay operating expenses in the
corresponding local currency and will be subject to increased risk for exchange
rate fluctuations between such local currency and the dollar. We do not conduct
any significant hedging activities.
The Company is exposed to equity price risks on its available-for-sale
securities. The Company's available-for-sale securities at January 31, 2001 is
comprised of an equity position in a marketing solutions agency which has
experienced volatility in its stock price. The Company typically does not
attempt to reduce or eliminate its market exposure on these securities.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated financial statements of the Company are included herein as a
separate section of this statement which begins on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning the directors and
executive officers of the Company:
NAME AGE POSITION
- - ---- --- --------
S. Leslie Flegel 63 Director, Chairman and Chief Executive Officer
James R. Gillis 48 Director, Chief Operating Officer and President
W. Brian Rodgers 35 Secretary and Chief Financial Officer
Dwight L. DeGolia 56 Executive Vice President, Special Projects
Jason S. Flegel 35 Executive Vice President, Information Services
Cameron Cloeter 46 Executive Vice President, Strategic Planning/Business Development
Monte Weiner 51 President & Chief Executive Officer - Source Display
Frank Bishop 50 Senior Vice President - Sales
James O. Tate 45 Senior Vice President - Director of Administration
James W. Brinkerhoff 57 Vice President - Human Resources
Robert O. Aders 74 Director
Harry L. "Terry" Franc, III 65 Director
Aron Katzman 63 Director
Randall S. Minix 51 Director
Kenneth F. Teasdale 66 Director
The Board consists of seven members, each of whom serves in that capacity for a
three year term or until a successor has been elected and qualified, subject to
earlier resignation, removal or death. The number of directors comprising the
Board may be increased or decreased by resolution adopted by the affirmative
vote of a majority of the Board. Our Articles of Incorporation and By-Laws
provide for three classes of directorships serving staggered three year terms
such that one class of the directors is elected at each annual meeting of
stockholders. The terms of Messrs. Aders and Flegel will continue until the 2001
annual meeting of stockholders, the terms of Messrs. Katzman, Minix and Gillis
will continue until the 2002 annual meeting of stockholders and the terms of
Messrs. Franc and Teasdale will continue until the 2003 annual meeting of
stockholders.
Each of the executive officers is a full-time employee of The Source.
Non-employee directors of The Source devote such time to the affairs of The
Source as is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the executive officers and directors of The Source:
S. Leslie Flegel has been the Chairman of the Board of Directors and Chief
Executive Officer of The Source since its inception in March 1995. For more than
14 years prior thereto, Mr. Flegel was the principal owner and Chief Executive
Officer of Display Information Systems Company, a predecessor of The Source. S.
Leslie Flegel is the father of Jason S. Flegel, The Source's Executive Vice
President, Information Services. Mr. Flegel is a director of eRoomSystem
Technologies,
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Inc.
James R. Gillis became President of The Source in December 1998, was appointed
as a director of The Source in March 2000 and became President and Chief
Operating Officer in August 2000. Prior thereto, he served as the President and
Chief Executive Officer of Brand Manufacturing Corporation.
Dwight L. DeGolia has served as Executive Vice President, Special Projects since
the Company's commencement of operations in May 1995. For more than ten years
prior thereto, Mr. DeGolia served as Executive Vice President of Sales and
Marketing for Display Information Systems Company. From 1986 to 1993, Mr.
DeGolia also served as a director of Advanced Marketing Services, a leading
supplier of books to wholesale clubs.
W. Brian Rodgers has served as Secretary and Chief Financial Officer since
October 1996. Prior to joining The Source, Mr. Rodgers practiced for seven years
as a Certified Public Accountant with BDO Seidman, LLP.
Jason S. Flegel has served as Executive Vice President, Information Services
since June 1996. Prior thereto, and since the Company's inception in March 1995,
he served as Vice President -- Western Region. For more than two years prior
thereto, Mr. Flegel was an owner and the Chief Financial Officer of DISC. Jason
S. Flegel is the son of S. Leslie Flegel.
Cameron Cloeter has served as Executive Vice President, Strategic Planning and
New Product Development since August 2000 and served as Executive Vice
President, Sales and Marketing from August 1999 until August 2000. For five
years prior thereto, Mr. Cloeter was Senior Vice President of Sales at
Time-Warner Inc.'s Time Distribution Services. Prior to joining Time
Distribution Services, Mr. Cloeter worked for M&M Mars for 15 years where his
last position was Director of Sales for the Eastern United States.
Monte Weiner has served as President and Chief Executive Officer - Source
Display since August 2000. Prior thereto, Mr. Weiner served as Executive Vice
President and Chief Executive Officer - Source Display from September 1999 until
May 2000. For more than 15 years prior thereto, Mr. Weiner served as President
of TCE Corporation and Secretary and Treasurer of Brand Manufacturing
Corporation.
Frank Bishop has served the Company since 1995, most recently as Senior Vice
President, Sales. Prior to joining the Company, Mr. Bishop served as the
Director of Sales a& Marketing for Triangle News Co, a wholesale distributor of
books and magazines.
James O. Tate has served as Senior Vice President, Administration since May
2000. Prior thereto, Mr. Tate was employed with American Media's Distribution
Services, Inc. for 20 years where his last position was Vice President -
Operations.
James W. Brinkerhoff has served as Vice President - Human Resources since
October 1999. Prior to joining The Source, Mr. Brinkerhoff was Vice President
Human Resources and Administration for Ganes Chemical, Inc. from June 1995.
Previous to Ganes, Mr. Brinkerhoff was Director, Human Resources for Potters
Industries, Inc.
Robert O. Aders was appointed as a director in March 1999. He is Chairman and
Chief Executive Officer of the Advisory Board, Inc. (an international consulting
organization) and a member of the Board of Directors of Food Marketing
Institute, where he served as President and CEO from its founding in 1976 until
his retirement in 1993. Mr. Aders was the Acting Secretary of Labor in the Ford
administration, is a former advisor to the White House Office of Emergency
Preparedness and has served on the U.S. Wage and Price Commission and as a Vice
Chairman of the National Business Council for Consumer Affairs. From 1970 to
1974, Mr. Aders was Chairman of the Board of the Kroger Company, where he served
in various executive positions beginning in 1957. Mr. Aders is also a member of
the Board of Directors of Coinstar, Inc., Spar Group, Inc. and Telepanel
Systems, Inc.
Harry L. "Terry" Franc, III, has been a director of The Source since it
commenced operations in May 1995. Mr. Franc is one of the founders of Bridge
Information Systems, Inc. ("BIS"), a global provider of information services to
the securities industry and of BIS's subsidiary, Bridge Trading Company ("BTC"),
a registered broker-dealer and member of the New York Stock Exchange. Mr. Franc
has been Executive Vice President of BTC for more than 20 years and for more
than 20 years prior to 1995, served as a director and an Executive Vice
President of BIS. Mr. Franc is a member of the National Organization of
Investment Professionals. He is a director of TV House, Inc. and of the St.
Louis Community Foundation.
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Aron Katzman has served as a director of The Source since it commenced
operations in May 1995. Mr. Katzman was a founder of Medicine Shoppe
International, Inc. (Nasdaq) and served on its Board of Directors until it was
purchased by Cardinal Health (NYSE) in 1994. Until its sale in May 1994, Mr.
Katzman served as the Chairman and Chief Executive Officer of Roman Company, a
manufacturer and distributor of fashion custom jewelry. Mr. Katzman is a member
of the board of directors of Foto, Inc. Presently, Mr. Katzman is Chairman and
Chief Executive Officer of Decorating Den of Missouri.
Randall S. Minix has served as a director of The Source since it commenced
operations in May 1995. As of March 1, 2001, Mr. Minix became the Chief
Financial Officer of South Atlantic Lumber Industries in Greensboro, North
Carolina. For more than five years prior thereto, Mr. Minix had been the
managing partner of Minix, Morgan & Company, L.L.P., an independent accounting
firm headquartered in Greensboro, North Carolina.
Kenneth F. Teasdale was appointed as a director of The Source in March 2000. Mr.
Teasdale has been the Chairman of Armstrong Teasdale LLP, a law firm, since 1993
and before that was Managing Partner from 1986 to 1993. He has been associated
with Armstrong Teasdale since 1964. Prior thereto, Mr. Teasdale served as
General Counsel to the Democratic Policy Committee of the United States Senate
beginning in 1962. In that position, he also served for three years as Legal
Assistant to the Majority Leader of the United States Senate. Mr. Teasdale is
Chairman of the Board of Regents for St. Louis University, Member of the Board
of Trustees for the St. Louis Science Center, member of the Board of Directors
for the United Way of Greater St. Louis, member of the Board of Trustees for St.
Louis University and member of the Board of Trustees for the St. Louis Art
Museum.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established an Audit Committee, a Compensation Committee, a
Finance Committee and an Acquisition Committee. The duties and members of each
of these committees are indicated below.
- - - The Audit Committee is comprised of two non-employee directors, presently
Messrs. Minix and Katzman, and has the responsibility of recommending the
firm that will serve as our independent auditors, reviewing the scope and
results of the audit and services provided by our independent accountants
and meeting with our financial staff to review accounting procedures and
policies.
- - - The Compensation Committee is comprised of three non-employee directors,
presently Messrs. Aders, Katzman and Minix, and has been given the
responsibility of reviewing our financial records to determine overall
compensation and benefits for executive officers and to establish and
administer the policies which govern employee salaries and benefit plans.
- - - The Finance Committee is comprised of two directors, Messrs. Franc and
Katzman. The Finance Committee has been given the responsibility of
monitoring our capital structure, reviewing available alternatives to
satisfy our liquidity and capital requirements and recommending the firm
or firms which will provide investment banking and financial advisory
services to us.
- - - The Acquisition Committee is comprised of four directors, presently Messrs.
Katzman, Aders, Franc and Minix, and has been given the responsibility of
monitoring our search for attractive acquisition opportunities, consulting
with members of management to review plans and strategies for the
achievement of our external growth objectives and recommending the firm or
firms that will serve as advisors to us in connection with the evaluation
of potential business combinations.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and Form 5 and amendments
thereto, or written representations that no Form 5 is required, all executive
officers and directors of the Company timely filed with the Securities and
Exchange Commission all reports required by Section 16(a) of the Securities
Exchange Act of 1934 except that Messrs. Weiner and Bishop filed a Form 3,
Initial Statement of Beneficial Ownership of Securities, more than 10 days after
they became executive officers of the Company and Mr. Teasdale failed to timely
file a Form 4, Statement of Changes in Beneficial Ownership. All such reports
have since been filed.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
NAME OF PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION(1)($)
- - -------------------- ----- ---------- ---------- ------------------ ------------------
S. Leslie Flegel 2001 $ 455,000 $ 359,217 -- $5,450
Chief Executive Officer 2000 330,000 140,000 525,000 5,450
1999 260,857 23,795 360,000 5,450
James R. Gillis 2001 $ 300,000 $ 250,000 200,000 $ 970
President 2000 250,000 250,000(2) -- 2,860
1999 21,308 -- 202,000 --
Monte Weiner 2001 $ 241,000 $ 250,000 200,000 --
Executive Vice President & 2000 150,000 100,000 25,000 --
CEO - Source Display 1999 -- -- 100,000 --
Dwight DeGolia 2001 $ 225,000 $ 50,000 -- $8,009
Executive Vice President, 2000 210,000 30,000 30,000 7,105
Special Projects 1999 175,000 -- 40,000 3,553
Cameron Cloeter 2001 $ 181,000 $ 37,712 50,000 1,225
Executive Vice President, 2000 80,000 -- 100,000 101
Strategic Planning/New Business 1999 -- -- -- --
- - ----------------
(1) In fiscal 2001, the estimated incremental cost to The Source of life
insurance premiums paid on behalf of Messrs. Flegel, Gillis, Weiner,
DeGolia and Cloeter was $5,450, $970, $0, $8,009 and $1,225, respectively.
In fiscal 2000, the estimated incremental cost to The Source of life
insurance premiums paid on behalf of Messrs. Flegel, Gillis, Weiner,
DeGolia and Cloeter was $5,450, $2,860, $0, $7,105 and $101, respectively.
In fiscal 1999, the estimated incremental cost to The Source of life
insurance premiums paid on behalf of Messrs. Flegel, Gillis, Weiner,
DeGolia and Cloeter was $5,450, $0, $0, $3,553 and $0.
(2) Includes $100,000 bonus accrued in fiscal year 2000, but paid in fiscal
year 2001, which was inadvertently not included in the proxy statement
dated September 22, 2000.
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OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- - ------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees in Base Price Expiration -----------------------------------------
Name Granted # Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- - ------------------------------------------------------------------------------------------------------------------------------
James R. Gillis 200,000(1) 26% 7.84 08-02-10 986,107 2,498,988
Monte Weiner 200,000(1) 26% 7.84 08-02-10 986,107 2,498,988
Cameron Cloeter 50,000(2) 7% 7.84 08-02-10 246,527 624,747
- - ------------------------------------------------------------------------------------------------------------------------------
(1) Options were granted August 3, 2000 and are exercisable in three equal
annual installments.
(2) Options were granted August 3, 2000 and are exercisable in five annual
installments.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- - -------------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Unexercised In-the-Money Options(2)/
Shares Options at Fiscal Year at Fiscal Year End ($)
Acquired on Value End (#) Exercisable/ Exercisable/
Name Exercise (#) Realized ($)(1) Unexercisable Unexercisable
- - ------------------------------------------------------------------------------------------------------------------------------
S. Leslie Flegel 0 0 598,424 / 375,832 425,498 / 77,400
James R. Gillis 67,333 435,344 134,000 / 200,667 0 / 0
Monte Weiner 5,000 3,450 133,334 / 133,333 0 / 0
Dwight DeGolia 0 0 60,727 / 20,182 48,553 / 6,851
Cameron Cloeter 0 0 35,000 / 115,000 0 / 0
- - ------------------------------------------------------------------------------------------------------------------------------
(1) The "value realized" represents the difference between the exercise price
of the option shares and the market price of the option shares on the date
the option was exercised. The value was determined without considering any
taxes which may have been owed.
(2) "In-the-Money" options are options whose exercise price was less than the
market price of Common Stock at January 31, 2001.
DIRECTOR COMPENSATION.
Under the Company's present policy, each director of the Company who is
not also an employee receives $15,000 annually payable quarterly in either cash
or shares of Common Stock valued at 90% of market on the date of grant as of the
payment date. Directors also annually receive options to purchase 10,000 shares
of Common Stock at an exercise price equal to market on the date of grant.
Directors are also entitled to be reimbursed for expenses incurred by them in
attending meetings of the Board and its committees.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS.
In February 2001, we entered into an employment agreement with S. Leslie Flegel,
which expires January 31, 2004. Under the agreement, Mr. Flegel serves as the
Chairman of the Board and Chief Executive Officer of The Source for an initial
annual base rate of compensation (the "Base Compensation") of $425,000. For the
fiscal years beginning February 1, 2002 and February 1, 2003, the Base
Compensation shall be increased to $500,000. Mr. Flegel will also be entitled to
receive a bonus ("Annual Bonus") each year of up to 100% of his Base
Compensation for such year if certain performance goals are
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met. The Company will also grant to Mr. Flegel options to purchase an aggregate
of 300,000 shares of our common stock (the "Option") at an exercise price of
$5.00. The Option will be exercisable as to 100,000 shares on the date of grant.
The Option will first become exercisable as to an additional 100,000 shares on
the earlier of (i) February 1, 2002 if the closing price of our common stock on
such date is not less than $8 per share, or (ii) on the first trading day
thereafter (not later than May 15, 2002) on which the average of the closing
sale price of our common stock for five (5) consecutive trading days is at least
$8 per share; provided, however, that the Option shall lapse and be forfeited
with respect to such 100,000 shares if neither of such conditions is satisfied
by May 15, 2002. The Option will first become exercisable as to the final
100,000 shares on the earlier of (i) February 1, 2003 if the closing price of
our common stock on such date is not less than $14 per share, or (ii) on the
first trading day thereafter (not later than May 15, 2003) on which the average
of the closing sale price of our common stock for five (5) consecutive trading
days is at least $14 per share; provided, however, that the Option shall lapse
and be forfeited with respect to such 100,000 shares if neither of such
conditions is satisfied by May 15, 2003. In the event the employment of Mr.
Flegel with The Source is terminated for reasons other than for cause, permanent
disability or death or there occurs a significant reduction in the position,
duties or responsibilities thereof (a "Termination") following a "Hostile Change
of Control" (as defined in the employment agreement), Mr. Flegel will be
entitled to a Severance Bonus equal to the sum of (i) the aggregate of the Base
Compensation that would be earned by Mr. Flegel had he remained in The Source's
employ from the date of such termination until January 31, 2004 (the "Remaining
Term") and (ii) an amount equal to the aggregate Annual Bonus Mr. Flegel would
have earned for the Remaining Term if all criteria for payment of the Annual
Bonus were achieved at maximum levels for each of the periods within the
Remaining Term. Mr. Flegel also will agree to refrain from disclosing
information confidential to The Source or engaging, directly or indirectly, in
the rendering of services competitive with those offered by The Source during
the term of his employment and for one year thereafter, without the prior
written consent of The Source and will receive $250,000 in consideration.
In October 1997, we entered into an employment agreement with W. Brian Rodgers,
for an initial term expiring on January 31, 1999, and thereafter automatically
continuing for additional one year terms unless terminated by either the
executive or us. Under the employment agreement, Mr. Rodgers serves as Chief
Financial Officer of The Source for an initial annual base compensation of
$100,000, subject to annual adjustment by the Compensation Committee of the
Board (the "Base Compensation"). In the event the employment of Mr. Rodgers with
The Source is terminated for reasons other than for cause, permanent disability
or death or there occurs a significant reduction in the position, duties or
responsibilities thereof (a "Termination") within two years following a "Change
of Control" (as defined in the employment agreement), Mr. Rodgers will be
entitled to an additional bonus of 300% of his then current annual Base
Compensation. Mr. Rodgers also will agree to refrain from disclosing information
confidential to The Source or engaging, directly or indirectly, in the rendering
of services competitive with those offered by The Source during the term of his
employment and for two years thereafter, without the prior written consent of
The Source.
In August 2000, we entered into an employment agreement with James R. Gillis,
which expires July 31, 2003 (subject to renewal). The employment agreement
provides that Mr. Gillis serves as President of The Source and receives annual
base compensation of $350,000. In addition, Mr. Gillis is entitled to receive a
guaranteed bonus of $250,000 for each of fiscal 2001, 2002 and 2003, as long as
he is an employee of The Source at the agreed upon date of payment. Mr. Gillis
may also receive a discretionary bonus of $100,000 for each of fiscal 2001, 2002
and 2003 at the discretion of the Compensation Committee of the Board of
Directors. The Company will also grant Mr. Gillis options to purchase an
aggregate of 200,000 shares of our common stock at an exercise price of $7.84.
The options shall vest as to 66,667 shares immediately upon the granting of the
options, another 66,666 shares on August 1, 2001, and as to 66,666 shares on
August 1, 2002. In the event the employment of Mr. Gillis is terminated for
reasons other than cause, permanent disability or death, Mr. Gillis will be
entitled to receive the remainder of his base salary and benefits for the
balance of the term of the agreement. Mr. Gillis agreed to refrain from
disclosing information confidential to The Source during the term of the
employment agreement and agreed not to engage, directly or indirectly, in the
rendering of services competitive with those offered by The Source during the
term of his employment and for two years thereafter.
In August 2000, we entered into an employment agreement with Monte Weiner, which
expires July 31, 2003 (subject to renewal). The employment agreement provides
that Mr. Weiner serves as President/Chief Executive Officer of Source Display
and receives annual base compensation of $300,000. Also, as an inducement to
accept employment, Mr. Weiner received a signing bonus of $100,000 upon
execution of his employment agreement. In addition, Mr. Weiner is entitled to
receive a guaranteed bonus of $150,000 for each of fiscal 2001, 2002 and 2003,
as long as he is an employee of The Source at the agreed upon date of payment.
Mr. Weiner may also receive a discretionary bonus of $100,000 for each of fiscal
2001, 2002 and 2003 at the discretion of the Compensation Committee of the Board
of Directors. The Company will also grant Mr.
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Weiner options to purchase an aggregate of 200,000 shares of our common stock at
an exercise price of $7.84. The options shall vest as to 66,666 shares
immediately upon the granting of the options, another 66,666 shares on August 1,
2001, and as to 66,667 shares on August 1, 2002. In the event the employment of
Mr. Weiner is terminated for reasons other than cause, permanent disability or
death, Mr. Weiner will be entitled to receive the remainder of his base salary
and benefits for the balance of the term of the agreement. Mr. Weiner agreed to
refrain from disclosing information confidential to The Source during the term
of the employment agreement and agreed not to engage, directly or indirectly, in
the rendering of services competitive with those offered by The Source during
the term of his employment and for two years thereafter.
In August 1999, we entered into an employment agreement with Cameron J. Cloeter,
which expires July 31, 2004 (subject to renewal). Under his agreement, Mr.
Cloeter serves as Executive Vice President, Strategic Planning and Business
Development of The Source and receives annual base compensation of $175,000. Mr.
Cloeter will also be entitled to receive an annual bonus equal to a percentage
of our net income before taxes not to exceed $65,700 if certain performance
goals are met. Mr. Cloeter will not be entitled to a bonus if our pre-tax net
income is not at least 82% of our budgeted pre-tax net income. In the event (1)
the employment of Mr. Cloeter is terminated for reasons other than for cause,
permanent disability or death, (2) there occurs an assignment of duties or
responsibilities inconsistent with Mr. Cloeter's appointed positions or (3)
there is a "Change of Control" (as defined in his employment agreement) (each of
the foregoing being a "Termination"), Mr. Cloeter will be entitled to receive
his accrued but unpaid base salary, his base salary for the remainder of the
term of the employment agreement, immediate vesting of options granted to Mr.
Cloeter under the employment agreement and payment of a bonus in an amount equal
to the greater of the annual bonus due in the year of termination or the annual
bonus for the prior year. Under the agreement, Mr. Cloeter agreed to refrain
from disclosing information confidential to The Source or engaging, directly or
indirectly, in the rendering of services competitive with those offered by The
Source during the term of his employment and for two years thereafter, without
the prior written consent of The Source.
Under the terms of a written agreement with us, Dwight L. DeGolia has agreed to
refrain from disclosing information confidential to us or engaging directly or
indirectly, in any activity which is competitive with our business during the
term of his employment and for two years thereafter.
In January 2001, we entered into an employment agreement with Jason S. Flegel,
which expires January 31, 2004, and thereafter automatically continues for
additional one year terms unless terminated by either the executive or us. The
employment agreement provides that Mr. Flegel serves as Executive
Vice-President, Information Services of The Source and receives annual base
compensation of $204,000, subject to annual adjustment by the Board. In
addition, Mr. Flegel may also receive a discretionary bonus of up to $100,000 at
the discretion of the Compensation Committee of the Board of Directors. The
Company will also grant Mr. Flegel stock options to purchase 50,000 shares of
our common stock at $3.6875. Such options shall vest with respect to 16,667
shares on each of February 1, 2002 and 2003 and 16,666 shares on February 1,
2004. Mr. Flegel agreed to refrain from disclosing information confidential to
The Source during the term of the employment agreement and agreed not to engage,
directly or indirectly, in the rendering of services competitive with those
offered by The Source during the term of his employment and for two years
thereafter.
Under the terms of a written agreement with us, James O. Tate has agreed to
refrain from disclosing information confidential to us or engaging directly or
indirectly, in any activity which is competitive with our business during the
term of his employment and for two years thereafter.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 31, 2001
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding Common Stock, (ii) each executive officer named in the
Summary Compensation Table contained in this Form 10-K, (iii) each director of
the Company and (iv) all directors and executive officers of the Company as a
group. Each person named has sole voting and investment power with respect to
the shares indicated, except as otherwise stated in the notes to the table:
BENEFICIAL OWNERSHIP (1)
NAME AND ADDRESS
OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT
- - ------------------- ---------------- -------
Jonathon J. Ledecky 2,640,000(2) 15.3%
800 Connecticut Avenue NW, Suite 1111
Washington, D.C. 20006
FMR Corporation 2,298,800(3) 13.3
82 Devonshire Street
Boston, Massachusetts, 02109
S. Leslie Flegel 1,700,243(2)(4) 9.4
Two City Place Drive, Suite 380
St. Louis, Missouri 63141
J.P. Morgan Chase & Co. 901,200(6) 5.2
500 Stanton Christiana Road
Newark, Delaware 19713
Aron Katzman 288,909(4) 1.7
10 Layton Terrace
St. Louis, Missouri 63124
James R. Gillis 175,168(4) 1.0
10 East 40th Street, Suite 3110
New York, New York 10016
Monte Weiner 151,168(4) *
10 East 40th Street, Suite 3110
New York, New York 10016
Dwight DeGolia 125,135(4) *
Two City Place Drive, Suite 380
St. Louis, Missouri 63141
Harry L. Franc, III 107,505(4) *
19 Briarcliff
St. Louis, Missouri 63124
Kenneth F. Teasdale 66,988(4) *
33 Kingsbury Place
St. Louis, Missouri 63112
Randall S. Minix 66,191(4) *
5502 White Blossom Drive
Greensboro, North Carolina 27410
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Robert O. Aders 55,000(4) *
132 S. Delancey Place
Atlantic City, New Jersey 08401
Cameron Cloeter 35,100(4) *
10 East 40th Street, Suite 3110
New York, New York, 10016
All directors and executive 3,040,098(2)(7) 16.1
officers as a group (15 persons)
- - ------------------------
*Less than 1%
(1) Under the rules of the Commission, some of the shares of the Company's
common stock which a person has the right to acquire within 60 days
after March 31, 2001 in connection with the exercise of stock options
and warrants are deemed to be outstanding for the purpose of computing
beneficial ownership and the percentage of ownership of that person.
(2) S. Leslie Flegel and Jonathan J. Ledecky entered into a Voting
Agreement on January 7, 1999, under which Mr. Ledecky granted a proxy
to Mr. Flegel to vote his shares of common stock with regard to certain
corporate matters. The number of shares shown for Mr. Flegel in the
table does not include Mr. Ledecky's shares.
(3) This amount, as reflected on Schedule 13G filed on February 14, 2001,
consists of sole voting power with respect to 0 shares, sole
dispositive power with respect to 2,298,800 shares and no shared voting
or dispositive power.
(4) Includes exercisable options to acquire shares of common stock in the
following amounts per beneficial owner: S. Leslie Flegel - 819,673
shares; Aron Katzman -40,000 shares; James R. Gillis - 166,667; Monte
Weiner - 150,000; DeGolia - 67,394; Harry L. Franc, III - 50,000
shares; Kenneth Teasdale - 20,000; Randall S. Minix - 50,000 shares;
Robert O. Aders - 50,000 shares; Cloeter - 15,667.
(5) This amount, as reflected on Schedule 13G filed on August 21, 2000,
consists of sole voting power with respect to 1,018,669 shares, sole
dispositive power with respect to 1,018,669 shares and no shared voting
or dispositive power.
(6) This amount, as reflected on Schedule 13G filed on February 21, 2001,
consists of sole voting power with respect to 828,600 shares, sole
dispositive power with respect to 901,200 shares and no shared voting
or dispositive power.
(7) Includes options and warrants to acquire 154,824 shares of common
stock, excluded in the names indicated in the footnotes above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time, we and our predecessors have engaged in various transactions
with our directors, executive officers and other affiliated parties. No such
transactions have occurred since the beginning of our last fiscal year.
24
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial statements:
Report of Independent Certified Public Accountants
Consolidated balance sheets - January 31, 2001 and 2000
Consolidated statements of operations - years ended January 31, 2001,
2000 and 1999
Consolidated statements of comprehensive income - years ended January
31, 2001, 2000 and 1999
Consolidated statements of stockholders' equity - years ended January
31, 2001, 2000 and 1999
Consolidated statements of cash flows - years ended January 31, 2001,
2000 and 1999
Notes to consolidated financial statements
2. Financial statement schedules. The following consolidated financial
statement schedule of The Source Information Management Company and
subsidiaries is included herein:
Report of Independent Certified Public Accountants S-1
Schedule II Valuation and qualifying accounts S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
3. Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the quarter
ended January 31, 2001.
25
28
INDEX TO FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENT OF THE SOURCE INFORMATION MANAGEMENT COMPANY PAGE
The Report of the Independent Certified Public Accountants F-2
Consolidated Balance Sheets of January 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the fiscal years ended January 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Comprehensive Income for the fiscal years ended January 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-8
F-1
29
The Report of the Independent Certified Public Accountants
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the consolidated balance sheets of The Source Information
Management Company as of January 31, 2001 and 2000 and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Source
Information Management Company at January 31, 2001 and 2000 and the results of
its operations and its cash flows for each of the three years in the period
ended January 31, 2001 in conformity with generally accepted accounting
principles in the United States of America.
/s/BDO Seidman, LLP
St. Louis, Missouri
April 12, 2001
F-2
30
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 31, 2001 2000
- - -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 1,085 $ 1,738
Trade receivables (net of allowance for doubtful accounts of $1,398 and
$1,123 at January 31, 2001 and 2000, respectively) 63,453 64,836
Income taxes receivable 3,648 -
Inventories (Note 4) 6,294 9,994
Other current assets 1,247 1,448
- - -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 75,727 78,016
- - -----------------------------------------------------------------------------------------------------------------------------
Land 2,233 2,233
Manufacturing plants 11,990 11,896
Office equipment and furniture 13,155 12,337
- - -----------------------------------------------------------------------------------------------------------------------------
Property, Plants and Equipment 27,378 26,466
Less accumulated depreciation and amortization 5,246 4,670
- - -----------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANTS AND EQUIPMENT 22,132 21,796
- - -----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization of $6,350 and $3,360 at January 31,
2001 and 2000, respectively (Note 5) 55,716 53,930
Marketable Securities (Note 6) 1,269 -
Notes receivable - officer (Note 2) - 975
Other 2,264 2,042
- - -----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 59,249 56,947
- - -----------------------------------------------------------------------------------------------------------------------------
$ 157,108 $ 156,759
- - -----------------------------------------------------------------------------------------------------------------------------
F-3
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
31
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 31, 2001 2000
- - -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 3,818 $ 1,217
Accounts payable and accrued expenses 6,097 9,239
Income taxes payable - 1,093
Due to retailers (Note 7) 2,693 3,723
Deferred income taxes (Note 9) 715 1,115
Current maturities of long-term debt (Note 8) 116 174
- - -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,439 16,561
- - -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 8) 31,780 32,215
- - -----------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES (Note 9) 88 569
- - -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 45,307 49,345
- - -----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS (Note 10)
- - -----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Contributed Capital:
Common Stock, $.01 par - shares authorized, 40,000,000; 18,372,332 issued,
of which 1,116,720 are being held as Treasury Stock at January 31, 2001 and
17,345,071 issued, of which 42,250 are being held as Treasury
Stock at January 31, 2000 183 173
Preferred Stock, $.01 par - shares authorized, 2,000,000; -0- issued and
outstanding at January 31, 2001 and 2000 - -
Additional paid-in-capital 97,773 91,770
- - -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital 97,956 91,943
Accumulated other comprehensive (loss) income (1,420) 80
Retained earnings 21,712 15,878
- - -----------------------------------------------------------------------------------------------------------------------------
118,248 107,901
Less: Treasury Stock (1,116,720 and 42,250 shares at cost at January 31, 2001
and 2000, respectively) (6,447) (487)
- - -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 111,801 107,414
- - -----------------------------------------------------------------------------------------------------------------------------
$ 157,108 $ 156,759
- - -----------------------------------------------------------------------------------------------------------------------------
F-4
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
32
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended January 31, 2001 2000 1999
- - --------------------------------------------------------------------------------------------------------------------
Service Revenues $ 24,238 $ 18,249 $ 14,229
Product Sales 67,510 64,239 6,871
- - --------------------------------------------------------------------------------------------------------------------
91,748 82,488 21,100
- - --------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 11,152 9,305 6,659
Cost of Goods Sold 48,678 39,564 4,609
- - --------------------------------------------------------------------------------------------------------------------
59,830 48,869 11,268
- - --------------------------------------------------------------------------------------------------------------------
31,918 33,619 9,832
Selling, General and Administrative Expense 20,032 14,880 2,949
- - --------------------------------------------------------------------------------------------------------------------
Operating Income 11,886 18,739 6,883
- - --------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 44 114 28
Interest expense (2,356) (1,033) (331)
Other 36 (152) (47)
- - --------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (2,276) (1,071) (350)
- - --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 9,610 17,668 6,533
Income Tax Expense (Note 9) 3,776 7,557 2,667
- - --------------------------------------------------------------------------------------------------------------------
Net Income $ 5,834 $ 10,111 $ 3,866
- - --------------------------------------------------------------------------------------------------------------------
Earnings per Share - Basic $ 0.33 $ 0.66 $ 0.42
- - --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 13) 17,591 15,332 9,132
- - --------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted $ 0.32 $ 0.60 $ 0.40
- - --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 13) 18,348 16,815 9,776
- - --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years Ended January 31, 2001 2000 1999
- - --------------------------------------------------------------------------------------------------------------------
Net Income $ 5,834 $ 10,111 $ 3,866
Unrealized Loss on Available-for-Sale Securities, net of tax (1,339) - -
Foreign Currency Translation Adjustment (161) 80 -
- - --------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 4,334 $ 10,191 $ 3,866
- - --------------------------------------------------------------------------------------------------------------------
F-5
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
33
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Preferred Stock Common Stock Additional Other Treasury Stock Total
----------------------------------------- Paid - in Retained Comprehensive --------------- Stockholders'
Shares Amount Shares Amount Capital Earnings Income Shares Amount Equity
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 8,016,367 $ 80 $ 10,514 $ 1,901 $ - $ 12,495
Issuance of Common Stock 1,538,334 15 8,001 8,016
Exercise of stock options 103,542 1 505 506
Exercise of warrants 1,181 6 6
Vesting of warrants issued 27 27
for consulting services -
Purchase of treasury stock 8,000 (41) (41)
Acquisitions 1,473,281 15 2,091,008 21 27,396 27,432
Other 993 3 3
Net income for the year 3,866 3,866
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1999 1,473,281 $ 15 11,751,425 $ 117 $ 46,452 $ 5,767 $ - 8,000 $ (41) $ 52,310
Conversion of Preferred (1,473,281) (15) 1,473,281 15 -
Stock to Common Stock
Issuance of Common Stock 3,000,000 30 35,694 35,724
Exercise of stock options 88,020 1 452 453
Exercise of warrants 242,047 2 1,082 1,084
Vesting of warrants issued 27 27
for consulting services
Warrants issued for 15 15
consulting services
Purchase of treasury stock 34,250 (446) (446)
Acquisitions 788,212 8 8,030 8,038
Foreign currency $ 80 80
translation adjustment
Other 2,086 18 18
Net income for the year 10,111 10,111
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 2000 - $ - 17,345,071 $ 173 $ 91,770 $ 15,878 $ 80 42,250 $ (487) $ 107,414
Exercise of stock options 109,965 1 860 861
Exercise of warrants 499,109 5 2,542 2,547
Issuance of common stock 40,000 180 180
for payment of note
payable
Vesting of warrants issued 23 23
for consulting services
Purchase of treasury stock 1,074,470 (5,960) (5,960)
Acquisitions 373,382 4 2,103 2,107
Foreign currency (161) (161)
translation adjustment
Net unrealized holding loss (1,339) (1,339)
on available-for-sale
securities
Tax benefit of stock 292 292
options exercised
Other 4,805 3 3
Net income for the year 5,834 5,834
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 2001 - $ - 18,372,332 $ 183 $ 97,773 $ 21,712 $(1,420) 1,116,720 $ (6,447) $ 111,801
==================================================================================================================================
F-6
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
34
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended January 31, 2001 2000 1999
- - --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,834 $ 10,111 $ 3,866
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,957 3,981 713
Provision for losses on accounts receivable 1,477 5 9
Loss on disposition of equipment 80 50 -
Write-off of deferred loan costs - 217 -
Tax benefit of stock option exercised 292 - -
Deferred income taxes 26 570 (438)
Other 126 1 50
Changes in assets and liabilities, net of effects
of acquisitions:
Increase in accounts receivable (256) (27,715) (7,794)
Decrease (increase) in inventories 3,700 (53) 3,298
(Increase) decrease in other assets (3,021) (2,295) 915
Decrease in accounts payable and accrued expenses (3,467) (2,210) (631)
(Decrease) increase in amounts due to retailers (1,030) 986 601
- - --------------------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 8,718 (16,352) 589
====================================================================================================================
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (3,517) (37,348) (4,794)
Capital expenditures (2,544) (3,772) (642)
Loans to officers (975) -
Collection on officers notes receivable 748 - 22
Proceeds from sale of fixed assets 9 5 -
Decrease (increase) in cash surrender value of life (35) 24 (42)
insurance
Investment in available-for-sale marketable securities (3,500) - -
- - --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (8,839) (42,066) (5,456)
====================================================================================================================
FINANCING ACTIVITIES
Increase (decrease) in checks issued against future 2,601 (1,660) 2,528
deposits
Proceeds from issuance of Common Stock 3,408 37,261 8,528
Borrowings under credit facility 89,587 99,548 36,483
Principal payments on credit facility (90,080) (74,928) (41,879)
Repayments under short-term debt agreements - - (31)
Deferred loan costs (57) (373) -
Common Stock reacquired (5,960) (445) (41)
Other financing activities (31) - -
- - --------------------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (532) 59,403 5,588
====================================================================================================================
INCREASE (DECREASE) IN CASH (653) 985 721
CASH, beginning of period 1,738 753 32
- - --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 1,085 $ 1,738 $ 753
====================================================================================================================
F-7
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
35
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Business
The Source Information Management Company (the Company) is a provider of
merchandise management information and related services primarily in connection
with the display and marketing of magazines and other periodicals throughout the
United States and Canada. The Company assists retailers in monitoring,
documenting, claiming and collecting incentive payments, primarily from
publishers of periodicals, and performs consulting and other services in
exchange for commissions. The Company also obtains revenues from consulting and
other services rendered to clients on other than a commission basis.
The Company also designs and manufactures custom-designed product display units
that are categorized as front-end merchandisers or point-of-purchase displays
used by retailers and consumer product manufacturers throughout the United
States and Canada. And in September 1999, the Company acquired two manufacturers
of custom wood displays and fixtures used by national retailers.
Principles of Consolidation
The consolidated financial statements include the accounts of The Source
Information Management Company and its wholly-owned subsidiaries (collectively,
the Company). The results of operations of Source-Canada Corp. and its
subsidiary, Source-Yeager Industries, Inc., Source-U.S. Marketing Services, Inc.
and its subsidiaries, Source-MYCO, Inc., Source-Chestnut Display Systems, Inc.,
and Source-Huck Store Fixture Company and its subsidiary are included in the
accompanying financial statements as of the date of acquisition. All material
intercompany accounts and transactions have been eliminated in consolidation.
Concentrations of Credit Risk
During fiscal 2001 approximately 15.1% of the Company's revenues were derived
from the services provided in connection with the collection of payments owed to
the Company's retailer clients from magazine publishers under programs designed
by the publishers to provide incentives to increase single copy magazine sales
(referred to as claim submission program services). The incentive programs,
although part of the publishers' marketing strategy for over 20 years, are
governed by short-term contracts. If magazine publishers discontinue or
significantly modify the incentive programs in such a manner which makes the
Company's services incompatible with the modified programs, the Company's
results of operations and financial condition may be materially and adversely
affected.
In the Advance Pay Program, the Company assumes the risk otherwise borne by the
retailer that magazine publishers will refuse or be unable to pay the amount of
incentive payments claimed. Based on historical experience, the Company
maintains a reserve for claims submitted but subject to such a refusal or
inability to pay. However, if a prominent magazine publisher files a petition in
bankruptcy, seeks other protection from its creditors or otherwise refuses to
pay, this reserve may be inadequate. The results of operations and the financial
condition of the Company could be materially affected.
In the display rack and store fixture manufacturing segment, the Company does
have significant client concentration. Substantially all of the Company's
services are performed under short-term contracts, thus permitting the Company's
clients to obtain services from other providers without further obligation to
the Company. If the Company experiences a significant reduction in business from
its clients, the Company's results of operations and financial condition may be
materially and adversely affected.
For fiscal 2001, two customers accounted for approximately 29% of revenues.
Borders accounted for approximately 15% of revenues and Kmart accounted for
approximately 14% of revenues. For fiscal 2000, two customers accounted
F-8
36
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for approximately 26% of revenues. Winn Dixie accounted for approximately 15% of
revenues and Ahold USA accounted for approximately 11% of revenues. For fiscal
1999, Food Lion, Inc. accounted for approximately 27% of revenues. With the
exception of Borders, for which we manufacture custom wood displays and
fixtures, our major customers are usually retailers in the process of
reconfiguring their checkout areas. Because this process typically occurs every
three years, our major customers vary from year to year.
Revenue Recognition
Under both the standard arrangement and the Advance Pay Program, service
revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers. The service revenues
recognized are based on the amount claimed multiplied by a commission rate, less
an estimated reserve necessary to maintain an allowance for doubtful accounts of
approximately 2% of trade accounts receivable. Under the standard arrangement,
invoices for claim processing services are not issued until the Company receives
settlement of the claim. However, under the Advance Pay Program, the customer is
not invoiced for the commission, which is the difference between the claim and
the advance amount.
Revenues from annual ICN, PIN and Store Level Data contracts are recognized
ratably over the subscription term, generally one year.
Front-end management revenues are recognized as services are performed.
The Company generally recognizes manufacturing revenues when products are
shipped. Upon request from a customer, the product can be stored for future
delivery for the convenience of the customer. This only occurs when the
manufacturing and earnings processes are complete, the customer accepts title in
writing, the product is invoiced with payment due in the normal course of
business, the delivery schedule is fixed and the product is segregated from
other goods. In our display rack and store fixture segment, we also receive
trucking revenues for transporting racks and warehousing revenues for storing
racks. We generally recognize trucking revenues as shipments are completed.
Warehousing revenues are recognized when services are rendered.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method.
Equipment and Furniture
Equipment and furniture are stated at cost. Depreciation is computed using the
straight-line method for financial reporting and accelerated methods for income
tax purposes over the estimated useful lives of 5 to 7 years.
Marketable Securities
Marketable securities are stated at fair market value or historical cost in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", and consists of an
investment in a equity security. Available-for-sale securities, which include
any security for which the Company has no immediate plan to sell but which may
be sold in the future, are valued at fair value. Unrealized gains and losses are
recorded, net of related income tax effects, as a separate component of equity.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
F-9
37
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
Goodwill
Goodwill represents the excess of the cost of a company acquired over the fair
value of the net assets acquired which is amortized over 15 to 20 years.
Deferred Loan Costs
Deferred loan costs represent the costs incurred relating to the Company's
revolving credit facility. These costs are being amortized by use of the
interest method over the life of the debt.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price greater than or equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25). That Opinion requires that compensation cost
related to fixed stock option plans be recognized only to the extent that the
fair value of the shares at the grant date exceeds the exercise price.
Accordingly, the Company recognizes no compensation expense for its stock option
grants.
In October 1995, the Financial Accounting Standards Board, issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion No. 25, but encourages the
adoption of a new accounting method based on the estimated fair value of
employee stock options. Pro forma net income and earnings per share, determined
as if the Company had applied the new method, are disclosed within Note 14.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets
In March 1995, SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets Disposed Of" was issued. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Management periodically reviews the carrying value of property and
equipment and intangibles in relation to the operating performance and future
undiscounted cash flows of the underlying business to determine whether
impairment exists. No impairment was identified for the years ended January 31,
2001, 2000 and 1999.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the
F-10
38
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
year. Translation adjustments arising from the use of differing exchange rates
from period to period are included in the other comprehensive income account in
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the Consolidated Statements of Operations.
Comprehensive Income
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. The Company's
two items of comprehensive income are foreign currency translation adjustments
and a net unrealized holding loss on available-for-sale securities.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which requires the presentation of "basic" earnings per
share, computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period, and
"diluted" earnings per share, which reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
At January 31, 2001, 2000 and 1999, options and warrants to purchase 1,373,274,
681,740 and 462,000 shares of common stock, respectively, were not included in
the computation of diluted EPS because the options' exercise prices were greater
than the average market price of the Company's common stock for 2001, 2001 and
1999, respectively.
Software Capitalization Policy
The Company capitalizes software in accordance with Statement of Position 98-1
("SOP 98-1"). The SOP allows capitalization of costs of computer software
developed or obtained for internal use only for (i) external direct costs of
materials and services incurred in developing or obtaining internal-use computer
software, (ii) payroll and payroll-related costs for employees who are directly
associated with and devote time to the internal-use computer software project,
to the extent of the time spent directly on the project, or (iii) interest costs
incurred while developing internal-use computer software.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company adopted SFAS No. 133 on February 1,
2000 and there was no material impact on the results of operations, financial
position or cash flows.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," providing the staff's views in
applying accounting principles generally accepted in the United States to
certain revenue recognition issues. The Company adopted SAB No. 101, as amended,
in the fourth quarter of fiscal 2001 and there was no material effect on the
Company's consolidated financial position or results of operations.
F-11
39
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RELATED PARTY TRANSACTIONS
In connection with his employment as Chief Operating Officer of the Company,
Richard Jacobsen received two loans in the amounts of $600,000 ("Loan 1") and
$375,000 ("Loan 2"). Loan 1, including interest, was to be forgiven over a
5-year term and Loan 2, including interest, was to be forgiven over a 7-year
term, provided, in each case, that he remained an employee of the Company. The
loans bear interest at 5% per annum. Mr. Jacobsen resigned in August 2000 and
repaid the outstanding balance on the loans in January 2001.
The Company leased certain office space from partnerships controlled by
stockholders of the Company. Amounts paid for the office space were
approximately $6,000, $114,000 and $278,000 for 2001, 2000 and 1999,
respectively. In May 1999, the Company purchased its facility in High Point,
North Carolina for $1.8 million. The facility was owned by a partnership in
which stockholders of the Company were partners. The Board of Directors
appointed Timothy Braswell, an independent director who has since resigned from
the Board, to negotiate the transaction on the Company's behalf and, based on
Mr. Braswell's recommendation, the Board believes the terms of the purchase were
fair to the Company.
3. ADVANCE PAY PROGRAM
The Company has established an Advance Pay Program. Under this program the
Company advances an agreed upon percentage of the incentive payments otherwise
due the retailer from magazine publishers upon quarterly submission of claims
for such payments. The claims otherwise due the retailer become due the Company.
Revenues associated with the Advance Pay Program include only the difference
between what the Company advances the retailer and what is due from the
publisher. The receivable equals the amount due from the publisher, not the
amount of revenue recorded.
4. INVENTORIES
Inventories consist of the following (in thousands):
January 31, 2001 2000
-----------------------------------------------------------------------------
Raw materials $ 3,072 $ 3,433
Work-in-process 1,470 2,286
Finished goods 1,752 4,275
-----------------------------------------------------------------------------
$ 6,294 $ 9,994
=============================================================================
5. BUSINESS COMBINATIONS
Acquisition of Periodical Concepts
On July 27, 1998, the Company acquired all the assets of Periodical Concepts, a
Texas general partnership doing business as PC2, for $2,500,000 in cash. Prior
to the acquisition, PC2 provided information and marketing services to retail
stores selling magazines and other periodicals. The Company has continued
servicing PC2's customer base through its operations in High Point, North
Carolina.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeds the fair value of the assets acquired by approximately
$2,400,000 and is being amortized straight line over 15 years.
F-12
40
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Yeager Industries, Inc.
On January 7, 1999, the Company acquired the net assets of Yeager Industries,
Inc. for $2.3 million in cash and 164,289 shares of the Company's Common Stock,
valued at the time of the acquisition at $1.15 million. The purchase price could
be increased by up to $500,000 (the "Earnout") depending on Yeager's performance
over the next two years. In April 2000, the parties terminated the Earnout
provision and the Company issued to Yeager 12,987 shares of the Company's common
stock. Yeager manufactures front-end display racks from facilities in
Philadelphia, Pennsylvania.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeds the fair value of the assets acquired by approximately
$1,247,000 and is being amortized straight line over 20 years.
Acquisition of U.S. Marketing Services, Inc.
On January 7, 1999 the Company acquired all of the stock of U.S. Marketing
Services, Inc. ("U.S. Marketing") in exchange for 1,926,719 shares of the
Company's Common Stock and 1,473,281 shares of the Company's Class A Convertible
Preferred Stock, valued at the time of the acquisition at $26.3 million in
total. The Class A Convertible Preferred Stock was converted into an equal
number of Common Shares on March 30, 1999. U.S. Marketing's subsidiary Brand
Manufacturing Corporation ("Brand") manufactures front-end display racks from
manufacturing facilities in Brooklyn, New York and a warehouse and distribution
facility in New Jersey. Through its affiliates, Brand provides trucking and
freight services and removes and disposes of display racks no longer required by
its customers.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$22,732,000 and is being amortized straight line over 20 years.
Acquisition of Chestnut Display Systems, Inc.
On February 1, 1999 the Company acquired the net assets of Chestnut Display
Systems, Inc. and its affiliate Chestnut Display Systems (North), Inc. for $3.6
million in cash and 285,714 shares of the Company's Common Stock, valued at the
time of acquisition at $1.8 million. The purchase price was increased by an
additional 130,000 shares of the Company's Common Stock issued in August 2000
and November 2000 based upon Chestnut meeting certain performance goals during
fiscal 2000 and 2001. Chestnut manufactures front-end display racks from its
facility in Jacksonville, Florida.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$7,178,000 and is being amortized straight line over 20 years.
Acquisition of MYCO, Inc.
On February 26, 1999 the Company acquired the net assets of MYCO, Inc. for $12
million in cash and 134,615 shares of the Company's Common Stock, valued at the
time of acquisition at $875,000. The Company also assumed MYCO's industrial
revenue bond indebtedness of $4 million and repaid MYCO's indebtedness of $1.5
million. The purchase price was increased by an additional 100,000 shares of the
Company's Common Stock issued in October 2000 based on
F-13
41
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MYCO's performance in the twelve months following the acquisition. MYCO is a
Rockford, Illinois manufacturer of front-end display racks.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$12,616,000 and is being amortized straight line over 20 years.
Acquisition of 132127 Canada, Inc.
On March 23, 1999 the Company purchased the net assets of 132127 Canada, Inc.,
known as ProMark, for $1.5 million Canadian. ProMark is a Canadian corporation
headquartered in Toronto which provides rebate and information services to
retail customers throughout Canada.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$682,000 and is being amortized straight line over 20 years.
Acquisition of Aaron Wire and Metal Products, Ltd.
On July 1, 1999 the Company acquired all of the stock of Aaron Wire and Metal
Products, Ltd. for $2.4 million Canadian. Aaron Wire manufactures front-end
display racks from manufacturing facilities in Vancouver, British Columbia.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$1,519,000 and is being amortized straight line over 20 years.
Acquisition of Huck Store Fixture Company
On September 21, 1999 the Company purchased the net assets of Huck Store Fixture
Company for $3.0 million in cash and 100,000 shares of the Company's common
stock, valued at the time of acquisition at approximately $1.5 million. The
Company also repaid Huck Store Fixture Company's indebtedness of approximately
$6.8 million. The sellers received a second payment, based on performance, which
was calculated and paid in January, 2000 in the amount of $6.8 million in cash
and 267,883 shares of the Company's common stock, valued at the time of issuance
at $3.8 million. In January 2001 an additional payment of approximately $3.5
million in cash and 130,395 shares of the Company's Common Stock was made to the
sellers based on Huck's performance for its year ended November 4, 2000. Huck
manufactures wood store fixtures from its facilities in Quincy, Illinois and
Carson City, Nevada.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded fair market value of the assets acquired by
approximately $9,856,000 and is being amortized straight line over 20 years.
Acquisition of Arrowood, Inc.
On September 27, 1999 the Company acquired the net assets of Arrowood, Inc. for
$939,000 in cash and two separate notes for a total of $380,000. Arrowood
manufactures wood store fixtures from its facility in Norwood, North
F-14
42
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carolina. Huck Store Fixture Company had entered into a letter of intent to
purchase Arrowood prior to the Company acquisition of Huck. With the North
Carolina facility, the Company has wooden store fixture manufacturing facilities
to service accounts on the East Coast, the Midwest and the West Coast.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded fair market value of the assets acquired by
approximately $449,000 and is being amortized straight line over 20 years.
Unaudited Pro Forma Results of Operations
Unaudited pro forma results of operations for 2000 and 1999 for the Company,
U.S. Marketing, MYCO and Huck, assuming the acquisitions took place on February
1, 1998, are listed below (in thousands):
Year Ended January 31, 2000 1999
------------------------------------------------------------------------------------------------
Total Revenues As reported $ 82,488 $ 21,100
Pro forma 95,528 71,721
Net Income As reported 10,111 3,866
Pro forma 11,376 3,866
Earnings Per Share
Basic As reported $ .66 $ .42
Diluted As reported .60 .40
Basic Pro forma .73 .30
Diluted Pro forma .67 .29
------------------------------------------------------------------------------------------------
6. MARKETABLE SECURITIES
Marketable securities with a cost of $3,500,000 have a market value at January
31, 2001 of $1,269,000. The gross unrealized loss of $2,231,000 is included net
of tax in Stockholders' Equity: Accumulated other comprehensive (loss) income.
7. DUE TO RETAILERS
For the services segment, the Company has arrangements with certain of its
customers whereby the Company is authorized to collect and deposit in its own
accounts, checks payable to its customers for incentive payments. The Company
retains the commission related to such payments and pays the customer the
difference.
For the display rack and store fixture manufacturing segment, Due to Retailers
represents funds collected on behalf of the retailers on front-end racking
programs and not yet remitted to the retailer.
F-15
43
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consists of (in thousands):
January 31, 2001 2000
-------------------------------------------------------------------------------------------------
Revolving Credit Facility $ 27,761 $ 27,899
Industrial Revenue Bonds 4,000 4,000
Unsecured note payable to former owners of acquired
company, non-interest bearing, payable in five equal
annual installments beginning in November 1999 - 240
Unsecured note payable to former owner of acquired
company, 7% annual interest, payable in two annual
installments beginning in September 2000 100 200
Other 35 50
-------------------------------------------------------------------------------------------------
Total Long-term Debt 31,896 32,389
Less current maturities 116 174
-------------------------------------------------------------------------------------------------
Long-term Debt $ 31,780 $ 32,215
=================================================================================================
Annual maturities of long-term debt are as follows: 2002 - $0.1 million; 2003 -
$27.8 million; thereafter - $4.0 million.
On December 22, 1999, the Company entered into an unsecured credit agreement
with Bank of America, N.A., replacing its previous credit agreement with
Wachovia Bank, N.A. The credit agreement enables the Company to borrow up to
$50.0 million under a revolving credit facility that terminates December 31,
2002. Borrowings under the credit facility bear interest at a rate equal to the
monthly LIBOR rate plus a percentage ranging from 1.0% to 2.1% depending on the
Company's ratio of funded debt to earnings before interest, taxes, depreciation
and amortization and carries a facility fee of 1/4 % per annum on the difference
between $25 million and the average principal amount outstanding under the loan
(if less than $25 million) plus 3/8% per annum of the difference between the
maximum amount of the loan and the greater of (i) $25 million or (ii) the
average principal amount outstanding under this loan. Under the credit
agreement, the Company is limited in its ability to declare dividends or other
distributions on capital stock or payments in connection with the purchase,
redemption, retirement or acquisition of capital stock and is required to
maintain certain financial ratios. The Company was in compliance with such
ratios at January 31, 2001. The availability at January 31, 2001 on the
revolving credit facility was approximately $18.2 million.
In connection with the acquisition of MYCO, Inc., the Company assumed the
liabilities of MYCO's Industrial Revenue Bonds. On January 30, 1995, the City of
Rockford issued $4.0 million of its Industrial Project Revenue Bonds, Series
1995, and the proceeds were deposited with the Amalgamated Bank of Chicago, as
trustee. Bank of America, N.A. has issued an unsecured letter of credit for $4.1
million in connection with the bonds with an initial expiration date of April
20, 2001. The bonds are secured by the trustee's indenture and the $4.1 million
letter of credit. The bonds bear interest at a variable weekly rate
(approximately 80% of the Treasury Rate) not to exceed 15% per annum. The bonds
mature on
F-16
44
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 1, 2030. Fees related to the letter of credit are .75% per annum of the
outstanding bond principal plus accrued interest.
9. INCOME TAXES
Provision (benefit) for federal and state income taxes in the consolidated
statements of operations consist of the following components (in thousands):
Year Ended January 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------------
Current
Federal $ 2,875 $ 5,590 $ 2,473
State 636 1,397 632
Foreign 239 - -
-----------------------------------------------------------------------------------------------------
Total Current 3,750 6,987 3,105
-----------------------------------------------------------------------------------------------------
Deferred
Federal 97 456 (349)
State 21 114 (89)
Foreign (92) - -
-----------------------------------------------------------------------------------------------------
Total Deferred 26 570 (438)
-----------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 3,776 $ 7,557 $ 2,667
=====================================================================================================
F-17
45
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The sources of
the temporary differences and their effect on deferred taxes are as follows (in
thousands):
January 31, 2001 2000
-----------------------------------------------------------------------------------------------------
Deferred Tax Assets
Net operating loss carryforward 285 1,052
Cost-based investment mark-to-market 893 -
Allowance for doubtful accounts 526 190
Self insurance 80 20
Deferred compensation 89 73
Accrued vacation 199 32
-----------------------------------------------------------------------------------------------------
2,072 1,367
Less: Valuation allowance (285) (1,052)
-----------------------------------------------------------------------------------------------------
Deferred Tax Asset, Net 1,787 315
-----------------------------------------------------------------------------------------------------
Deferred Tax Liabilities
Book/tax difference in accounts receivable 1,447 1,303
Income not previously taxed under cash
basis of accounting for income tax purposes 16 69
Book/tax difference in property and equipment 496 116
Goodwill 573 511
Other 58 -
-----------------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 2,590 1,999
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Net Deferred Tax Liability 803 1,684
-----------------------------------------------------------------------------------------------------
Classified as:
Current liability 715 1,115
Long-term liability 88 569
-----------------------------------------------------------------------------------------------------
Net Deferred Tax Liability 803 1,684
=====================================================================================================
The deferred tax asset in the accounts of Source-U.S. Marketing Services, Inc.
("Source-U.S. Marketing") totaling $285,000 and $1,052,000 for the years ended
January 31, 2001 and 2000, respectively, are fully offset by a valuation
allowance of the same amount due to uncertainty regarding its ultimate
utilization. At January 31, 2001 and 2000, Source-U.S. Marketing had net
operating loss ("NOL") carryforwards of approximately $737,000 and $1,884,000,
respectively, expiring through 2018. Brand, a wholly owned subsidiary of
Source-U.S. Marketing, had NOL carryforwards at January 31, 2001 and 2000 of
approximately $0 and $840,000, respectively, expiring through 2018.
All of the valuation allowance for deferred tax assets for subsequently
recognized tax benefits will be allocated to reduce goodwill. As a result of the
utilization of the NOL in 2001, goodwill related to the acquisition of
Source-U.S. Marketing was reduced by $767,000.
F-18
46
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summary reconciles income taxes at the maximum federal statutory
rate with the effective rates for 2001, 2000 and 1999 (in thousands):
Year Ended January 31, 2001 2000 1999
--------------------------------------------------------------------------------------------------------
Income tax expense (benefit) at statutory rate $ 3,267 $ 6,007 $ 2,221
State income tax expense (benefit), net of
federal income tax benefit 444 887 379
Non-deductible goodwill amortization 478 510 134
Difference in foreign tax rates (142) 50 -
Other, net (271) 103 (67)
--------------------------------------------------------------------------------------------------------
Income Tax Expense $ 3,776 $ 7,557 $ 2,667
========================================================================================================
10. COMMITMENTS
Leases
The Company leases office and manufacturing space, an apartment, computer
equipment, and vehicles under leases that expire over the next five years.
Management expects that in the normal course of business, leases will be renewed
or replaced with other leases. Rent expense was approximately $1,785,000,
$1,734,000 and $622,000 for the years ended January 31, 2001, 2000 and 1999,
respectively. Amounts paid to related parties included in total rent expense
were approximately $6,000, $114,000 and $278,000 for 2001, 2000 and 1999,
respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at January 31, 2001 (in thousands):
Capital Operating
Year Ending January 31, Leases leases
-----------------------------------------------------------------------------------------------------
2002 $ 19 $ 2,007
2003 19 1,616
2004 1 1,467
2005 - 1,294
2006 - 714
Thereafter - 2,234
-----------------------------------------------------------------------------------------------------
Total minimum lease payments 39 $ 9,332
============================
Amount representing interest 4
-------------------------------------------------------------------------
Present Value of Net Minimum Lease Payments $ 35
=========================================================================
Litigation
The Company has pending certain legal actions and claims incurred in the normal
course of business and is actively pursuing the defense thereof. In the opinion
of management, these actions and claims are either without merit or are
F-19
47
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
covered by insurance and will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
Employment agreements
The Company has entered into employment agreements with certain officers and key
employees. These agreements expire at dates ranging from January 2002 to July
2004, are subject to annual renewal, and require annual salary levels and
termination benefits, should a termination occur. Annual requirements in
connection with the employment agreements are approximately as follows: 2002 -
$2,176,000; 2003 - $2,096,000; 2004 - $1,211,000; 2005 - $341,000.
Consulting agreements
The Company entered into a consulting agreement with Herbert A. Hardt commencing
on August 31, 1998 and ending November 25, 2000. The agreement requires the
Company to issue a warrant, expiring January 31, 2001, to purchase 150,000
shares of Common Stock, which was independently appraised at $37,500. This value
will be recognized as expense in relation to the vesting period of the warrant.
The warrant vests 15,000 shares per quarter during each quarter of fiscal year
2000 and 22,500 shares per quarter during each quarter of fiscal year 2001.
Union Contracts
At January 31, 2001, approximately 210 of the Company's 850 employees were
members of a collective bargaining unit. The Company is party to two collective
bargaining agreements, which expire on December 31, 2005 and September 30, 2004.
Company contributions to the Union funds charged to operations were
approximately $440,000, $435,000 and $64,000 for the years ended January 31,
2001, 2000 and 1999, respectively.
11. COMMON STOCK
In September 1997, the Company issued to Aron Katzman, Harry L. Franc, III and
Timothy A. Braswell, each a director of the Company, non-transferable warrants,
expiring in 2000, to purchase an aggregate of 89,289 shares of Common Stock at
an exercise price of $3.00 per share. These warrants vested at a rate of 25% on
August 1, 1998, 25% on November 1, 1998, 25% on February 1, 1999 and 25% on May
1, 1999. The related cost as determined by independent appraisal of
approximately $54,000 was recognized ratably over those periods. The warrants
were exercised as of January 31, 2001.
The following table summarizes information about the warrants for common stock
outstanding at January 31, 2001:
Exercise Price Number Outstanding Date Exercisable
---------------------------------------------------------------------------------
3.00 10,709 July 1, 1997
7.84 2,500 August 2, 2001
7.84 2,500 August 2, 2002
8.40 200,000 June 15, 1999
14.00 8,548 August 31, 2000
14.00 8,548 August 31, 2001
14.00 8,548 August 31, 2002
---------------------------------------------------------------------------------
F-20
48
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PREFERRED STOCK
The Company has authorized 2,000,000 shares of $.01 par Preferred Stock. On
March 13, 1996, 65,000 shares were designated as 1996 Series 7% Convertible
Preferred Stock. Rights and restrictions on the remaining shares will be
established if, and when, any shares are issued.
Each share of the 1996 Series 7% Convertible Preferred Stock entitles its holder
to receive an annual dividend, when and as declared by the Board of Directors,
of $7 per share payable in shares of the Company's Common Stock; to convert it
into shares of Common Stock; to receive $100 per share in the event of
dissolution, liquidation, or winding up of the Company, whether voluntary or
involuntary; and subject to certain conditions in the Certificate of
Designations, Preferences and Relative Rights of 1996 Series 7% Convertible
Preferred Stock, may be redeemed at the option of the Company at a price of $100
per share within 30 days following the effective date of a merger or
consolidation in which the Company is not the surviving entity.
Each share of the 1996 Series 7% Convertible Preferred Stock shall be
convertible, at the option of the holder thereof, into shares of the Common
Stock of the Company, at the conversion price equal to 80% of the current market
price of the Common Stock, provided, however, the conversion price shall not be
less than $4.24 nor more than $6.66 per share of Common Stock. For purposes of
such conversion, each share of the 1996 Series 7% Convertible Preferred Stock
shall be accepted by the Company for surrender at its Liquidation Amount of $100
per share.
On January 6, 1999, 1,500,000 shares of Preferred Stock were designated as Class
A Convertible Preferred Stock. On January 7, 1999, 1,473,281 shares of Class A
Convertible Preferred Stock were issued in connection with the acquisition of
U.S. Marketing Services, Inc. On March 30, 1999 the Preferred Stock was
converted to 1,473,281 shares of Common Stock.
13. EARNINGS PER SHARE
A reconciliation of the denominators of the basic and diluted earnings per share
computations are as follows (in thousands):
Year Ended January 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 17,591 15,332 9,132
Effect of dilutive securities:
Stock options and warrants 757 1,249 547
Incremental shares from assumed conversion of
preferred stock - 234 97
-------------------------------------------------------------------------------------------------------
Total effect of dilutive securities 757 1,483 644
-------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding -
as adjusted 18,348 16,815 9,776
-------------------------------------------------------------------------------------------------------
14. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
The Company has a combined profit sharing and 401(k) Plan. Annual contributions
to the profit sharing portion of the Plan are determined by the Board of
Directors and may not exceed the amount that may be deducted for federal income
F-21
49
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
tax purposes. There were no profit sharing contributions charged against
operations for the years ended January 31, 2001, 2000, and 1999.
Under the 401(k) portion of the Plan, all eligible employees may elect to
contribute 2% to 20% of their compensation up to the maximum allowed under the
Internal Revenue Code. The Company matches one half of an employee's
contribution, not to exceed 5% of the employee's salary. The amounts matched by
the Company during the years ended January 31, 2001, 2000, and 1999 pursuant to
this Plan were approximately $283,000, $214,000 and $63,000, respectively.
Deferred Compensation Plan
During fiscal year 1997, the Company established an unfunded deferred
compensation plan for certain officers, who elect to defer a percentage of their
current compensation. The Company does not make contributions to the plan and is
responsible only for the administrative costs associated with the plan. Benefits
are payable to the participating officers upon their death or termination of
employment. From the deferred funds, the Company has purchased certain life
insurance policies. However, the proceeds and surrender value of these policies
are not restricted to pay deferred compensation benefits when they are due.
Stock Option Plans
Under the Company's stock option plans, options to acquire shares of Common
Stock have been made available for grant to certain employees and non-employee
directors. Each option granted has an exercise price of not less than 100% of
the market value of the Common Stock on the date of grant. The contractual life
of each option is generally 10 years. The exercisability of the grants vary
according to the individual options granted.
Weighted
Range of Average
Number of Exercise Exercise
Options Prices Price
--------------------------------------------------------
Options outstanding at
January 31, 1998 397,827 1.66 -5.60 3.47
Options granted 1,036,820 5.00 - 10.88 7.09
Options expired 56,047 2.42 - 5.60 4.36
Options exercised 103,542 2.42 - 5.60 4.88
--------------------------------------------------------
Options outstanding at
January 31, 1999 1,275,058 1.66 -10.88 6.26
Options granted 1,797,640 9.75 - 21.60 13.93
Options expired 20,883 2.42 - 13.94 6.13
Options exercised 88,020 2.42 - 7.38 5.14
--------------------------------------------------------
Options outstanding at
January 31, 2000 2,963,795 1.66 - 21.60 10.95
Options granted 757,000 3.69 - 18.31 8.28
Options expired 544,782 2.42 - 16.63 11.55
Options exercised 109,965 2.42 - 16.63 7.83
--------------------------------------------------------
Options outstanding at
January 31, 2001 3,066,048 1.66 - 21.60 10.29
--------------------------------------------------------
F-22
50
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the stock options outstanding
at January 31, 2001:
Number Remaining Contractual Options
Exercise Price Outstanding Life (Months) Exercisable
--------------------------------------------------------------------------------------------------
1.66 89,256 16 89,256
2.42 46,061 77 38,425
2.66 49,091 17 49,091
3.69 50,000 119 0
3.88 20,000 119 4,000
5.00 110,766 92 94,766
5.13 370,000 84 190,000
5.59 45,000 117 9,000
5.94 10,000 118 2,000
6.13 455 89 455
6.63 455 87 455
7.38 2,000 94 0
7.81 134,667 94 67,334
7.84 540,000 114 161,334
9.75 6,000 96 6,000
10.38 12,000 98 12,000
10.44 20,000 105 8,000
10.88 212,667 95 150,667
11.41 125,000 38 62,500
12.44 100,000 102 25,000
13.25 417,000 103 209,067
14.00 1,000 103 667
14.31 10,000 104 4,000
14.88 22,000 112 4,400
14.94 5,000 102 2,000
15.00 100,000 102 66,667
15.31 150,000 104 16,666
16.25 50,000 108 50,000
16.63 157,630 106 72,924
18.00 100,000 102 66,667
18.31 10,000 110 10,000
21.60 100,000 102 66,667
------- ------
3,066,048 1,540,008
--------------------------------------------------------------------------------------------------
Options exercisable at January 31, 2001 totaled 1,540,008 with a weighted
average exercise price of $10.17. Options exercisable at January 31, 2000
totaled 831,919 with a weighted average exercise price of $9.72. Options
exercisable at January 31, 1999 totaled 235,673 with a weighted average exercise
price of $5.82. The weighted average fair value of each option granted during
the year was $3.47, $4.17 and $1.34 (at grant date) in 2001, 2000 and 1999,
respectively.
The options above were issued at exercise prices which were equal to or exceeded
quoted market price at the date of grant. At January 31, 2001, 1,600,904 shares
were available for grant under the plans.
F-23
51
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed in the Summary of Accounting Policies, the Company applies APB
Opinion No. 25 and related interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, the Company's consolidated net
income and consolidated income per share would have been reduced to the pro
forma amounts indicated below:
Year Ended January 31, 2001 2000 1999
------------------------------------------------------------------------------------------------------
Net income As reported $ 5,834 $ 10,111 $ 3,866
Pro forma 4,776 9,374 3,766
Basic earnings per share As reported 0.33 0.66 0.42
Pro forma 0.27 0.61 0.41
Diluted earnings per share As reported 0.32 0.60 0.40
Pro forma 0.26 0.56 0.39
------------------------------------------------------------------------------------------------------
The pro forma amounts reflected above are not representative of the effects on
reported net income in future years because in general, the options granted
typically do not vest for several years and additional awards are made each
year. The fair value of each option grant is estimated on the grant date using
the Black-Scholes option pricing model with the following assumptions:
Year Ended January 31, 2001 2000 1999
------------------------------------------------------------------------------------------------------
Dividend yield 0% 0% 0%
Range of expected lives (years) 3.0 1.5 - 3.0 1.0 - 2.05
Range of expected volatility 0.5552 0.49 0.30 - 0.40
Risk-free interest rate 4.92% - 6.82% 4.65% - 6.00% 4.11% - 5.66%
------------------------------------------------------------------------------------------------------
Stock Award Plan
In September 1996, the Company adopted its Stock Award Plan for all employees
and reserved 41,322 shares of Common Stock for such plan. Under the plan, the
Stock Award Committee, appointed by the Board of Directors of the Company, shall
determine the employees to whom awards shall be granted. No awards were granted
during the years ended January 31, 2001, 2000 or 1999.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on the approximate amount of interest and income taxes
paid is as follows (in thousands):
Year Ended January 31, 2001 2000 1999
------------------------------------------------------------------------------------------------------
Interest $ 2,241 $ 999 $ 357
Income Taxes $ 7,433 $ 5,653 $ 2,222
------------------------------------------------------------------------------------------------------
In connection with the acquisitions in January 1999, the Company issued
2,091,008 shares of Common Stock and 1,473,281 shares of Class A Convertible
Preferred Stock which were converted to an equal number of common shares on
F-24
52
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 30, 1999. An additional 12,987 shares of Common Stock was issued in fiscal
year 2001 in connection with these acquisitions.
In connection with the acquisitions in February 1999, the Company issued 420,329
shares of Common Stock during fiscal year 2000 and 230,000 shares of Common
Stock during fiscal year 2001.
In connection with the acquisition in September 1999, the Company issued 367,883
shares of Common Stock during fiscal year 2000 and 130,395 shares of Common
Stock during fiscal year 2001.
The Company issued 40,000 shares of Common Stock as payment for the remaining
balance of $180,000 on the unsecured note payable to former owners of acquired
company. The number of shares was determined based on the quoted market price at
the time of the exchange.
In conjunction with business acquisitions, the Company used cash as follows (in
thousands):
Year Ended January 31,
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Fair Value of assets acquired, excluding cash $ 59,612 $ 37,843
Less: Liabilities assumed and created upon acquisition 14,226 5,617
Less: Stock issued 8,038 27,432
---------------------------------------
Net cash paid $ 37,348 $ 4,794
- - -------------------------------------------------------------------------------------------------------------------
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair values of
each class of financial instruments for which it is practicable to estimate that
value:
Trade Receivables and Income Taxes Receivable
The carrying amounts approximate fair value because of the short maturity of
those instruments.
Marketable Securities
Fair value is based on quoted market prices.
Notes Receivable - Officer
The carrying amount of notes receivable - officer has been discounted to its
present value.
Accounts Payable and Accrued Expenses, Income Taxes Payable and Amounts
Due to Retailers
Carrying amounts are reasonable estimates of fair value due to the relatively
short period between origination and expected repayment of these instruments.
F-25
53
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term Debt and Revolving Credit Facility
It is presumed that the carrying amount of the revolving credit facility is a
reasonable estimate of fair value because the financial instrument bears a
variable interest rate.
The carrying amount of other long-term debt has been discounted to its present
value.
The estimated fair values of the Company's financial instruments are as follows:
Carrying Fair
January 31, 2001 value value
------------------------------------------------------------------------------------------
Financial Assets
Trade receivables $ 63,453 $ 63,453
Income taxes receivable $ 3,648 $ 3,648
Marketable securities $ 1,269 $ 1,269
Financial Liabilities
Accounts payable and accrued expenses $ 6,097 $ 6,097
Due to retailers $ 2,963 $ 2,963
Long-term debt $ 31,896 $ 31,888
------------------------------------------------------------------------------------------
January 31, 2000
------------------------------------------------------------------------------------------
Financial Assets
Trade receivables $ 64,836 $ 64,836
Notes receivable - officer $ 975 $ 920
Financial Liabilities
Accounts payable and accrued expenses $ 9,239 $ 9,239
Income taxes payable $ 1,093 $ 1,093
Due to retailers $ 3,723 $ 3,723
Long-term debt $ 32,389 $ 32,314
------------------------------------------------------------------------------------------
F-26
54
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SEGMENT FINANCIAL INFORMATION
The Company is engaged in two lines of business based on the reporting of senior
management to the Chief Executive Officer. The reportable segments of the
Company are services and display rack and store fixture manufacturing. The
accounting policies of the segments are the same as those described in the
Summary of Accounting Policies. Segment operating results are measured based on
operating income. Intersegment sales eliminated were approximately $136,000 for
the year ended January 31, 2001. There were no intersegment sales during the
years ended January 31, 2000 or 1999.
Display Rack &
Store Fixture
Services Manufacturing Consolidated
----------------------------------------------------
Year Ended January 31, 2001
---------------------------------------------------
Revenue $24,238 $67,646 $91,748
Cost of Revenue 11,152 48,678 59,830
----------------------------------------------------
Gross Profit 13,086 18,968 31,918
Selling, General & Administrative 20,032
----------------
Operating Income 11,886
Other Expenses, net 2,276
----------------
Income Before Income Taxes $9,610
================
Total Assets $55,891 $101,217 $157,108
====================================================
Year Ended January 31, 2000
---------------------------------------------------
Revenue $18,249 $64,239 $82,488
Cost of Revenue 9,305 39,564 48,869
====================================================
Gross Profit 8,944 24,675 33,619
Selling, General & Administrative 14,880
----------------
Operating Income 18,739
Other Expenses, net 1,071
----------------
Income Before Income Taxes $17,668
================
Total Assets $48,408 $108,351 $156,759
====================================================
Year Ended January 31, 1999
---------------------------------------------------
Revenue $14,229 $6,871 $21,100
Cost of Revenue 6,659 4,609 11,268
----------------------------------------------------
Gross Profit 7,570 2,262 9,832
Selling, General & Administrative 2,949
----------------
Operating Income 6,883
Other Expenses, net 350
----------------
Income Before Income Taxes $6,533
================
Total Assets $33,026 $32,762 $ 5,878
====================================================
F-27
55
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. QUARTERLY INFORMATION (Unaudited) (in thousands, except per share data)
Quarter ended
April 30 July 31 October 31 January 31
------------------------------------------------------------------------
2001
----
Total Revenue $24,861 $22,304 $26,259 $18,324
Gross Profit 9,733 7,582 9,970 4,633
Net Income 2,974 1,767 652 441
EPS - Diluted $0.16 $0.10 $0.04 $0.03
2000
----
Total Revenue $16,480 $15,985 $25,215 $24,808
Gross Profit 6,868 6,867 9,056 10,828
Net Income 1,894 1,930 2,868 3,419
EPS - Diluted $0.13 $0.12 $0.16 $0.19
-------------------------------------------------------------------------------------------------------
19. SUBSEQUENT EVENTS (Unaudited)
On March 5, 2001 the Company signed a letter of intent to acquire 100% of
InterLink and its operating companies, including International Periodical
Distributors, Inc., a direct distributor of magazines, and DEYCO, a specialty
national magazine distributor, for $1,200,000 in cash and 1,220,000 shares of
the Company's common stock. Previously, on February 22, 2001, the Company had
acquired 15% of InterLink's outstanding common shares and 294,497 shares of
InterLink's Series B Convertible Preferred Stock for $6,330,000. Additionally,
the Company loaned InterLink $4,170,000 in the form of a convertible note.
InterLink may repay the note at any time until February 22, 2010, at which time
the note will be automatically converted into 88,349 shares of common stock. The
Company has the right to convert the note at any time after February 22, 2007
into 88,349 shares of common stock. The note bears interest at 8.4% per annum,
payable quarterly.
F-28
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: April 30, 2001 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
April 30, 2001 /S/ S. LESLIE FLEGEL
--------------------
S. Leslie Flegel
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
April 30, 2001 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
April 30, 2001 /S/ JAMES R. GILLIS
-------------------
James R. Gillis
President and Chief Operating Officer
Director
April 30, 2001 /S/ ROBERT O. ADERS
-------------------
Robert O. Aders
Director
April 30, 2001 /S/ HARRY L. "TERRY" FRANC, III
-------------------------------
Harry L. "Terry" Franc, III
Director
April 30, 2001 /S/ ARON KATZMAN
----------------
Aron Katzman
Director
April 30, 2001 /S/ RANDALL S. MINIX
--------------------
Randall S. Minix
Director
April 30, 2001 /S/ KENNETH F. TEASDALE
-----------------------
Kenneth F. Teasdale
Director
57
Report of Independent Certified Public Accountants
Board of Directors
The Source Information Management Company
St. Louis, Missouri
The audits referred to in our report dated April 12, 2001, relating to the
consolidated financial statements of The Source Information Management Company,
which are referred to in Item 8 of this Form 10-K, included the audit of the
accompanying financial statement schedule. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audits. In our
opinion, such financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/BDO Seidman, LLP
St. Louis, Missouri
April 12, 2001
S-1
58
SCHEDULE II
The Source Information Management Company
Valuation and Qualifying Accounts Schedule
January 31, 2001
- - -----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-----------------------------
Charged to
Balance at Charged to other
beginning of costs and accounts- Balance at
Description period expenses describe (1) Deductions end of period
- - -----------------------------------------------------------------------------------------------------------------
Year ended January 31, 2001:
Allowance for doubtful accounts 1,122,734 1,477,411 - 1,202,563 1,397,582
Year ended January 31, 2000:
Allowance for doubtful accounts 469,658 4,830 648,246 - 1,122,734
Year ended January 31, 1999:
Allowance for doubtful accounts 460,898 8,760 - - 469,658
(1) Additions due to acquisitions
S-2
59
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
--------- ---------------------------------------------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Amendment to Articles of Incorporation(2)
3.4 Amendments to Bylaws(2)
3.5 Amendment to Articles of Incorporation(3)
3.6 Amendment to Articles of Incorporation(4)
4.1 Form of Common Stock Certificate(2)
4.2 Form of Representative's Warrants(2)
4.3 Form of Privately Issued Warrant(2)
9.1 Voting Agreement dated January 7, 1999 between S. Leslie Flegel and Jonathan J. Ledecky(4)
10.1 Form of Indemnity Agreement with Officers and Directors(1)
10.2 Credit Agreement between The Source Information Management Company and Bank of
America, N.A. dated December 22, 1999(12)
10.3 The Source Information Management Company Amended and Restated 1995 Incentive Stock
Option Plan (14)
10.4 The Source Information Management Company Stock Award Plan(6)
10.5 Form of Employment Agreement with W. Brian Rodgers(2)
10.6 Employment and Non-Competition Agreement with James R. Gillis dated as of December
14, 1998(10)
10.6.1 Amendment to Employment and Non-Competition Agreement with James R. Gillis dated as of
August 3, 2000*
10.7 Employment Agreement with Richard A. Jacobsen dated as of March 24, 1999(10)
10.8 Agreement with Dwight L. DeGolia(2)
10.9 Form of Financial Consulting Agreement with Donald & Co. Securities Inc.(2)
10.10 Agreement and Plan of Merger dated as of January 7, 1999 by and among The Source
Information Management Company, Source-U.S. Marketing Services, Inc., U.S. Marketing
Services, Inc. and U.S. Marketing Shareholders(8)
10.11 Asset Purchase Agreement dated as January 7, 1999 by and among The Source
Information Management Company and Yeager Industries, Inc.(8)
10.12 Asset Purchase Agreement dated as of February 1, 1999 by and among The Source
Information Management Company, Chestnut Display Systems, Inc. and Chestnut Display
Systems (North), Inc.(9)
10.13 Asset Purchase Agreement dated as of February 26, 1999 by and among The Source
Information Management Company, MYCO, Inc. and RY, Inc.(9)
10.14 Amendment to Asset Purchase Agreement dated as of February 26, 1999 by and among The
Source Information Management Company, MYCO, Inc. and RY, Inc.(9)
10.15 Asset Purchase Agreement dated March 19, 1999 between The Source Information
Management Company, The Source-Canada Corp. and 132127 Canada Inc.(4)
10.16 Real Estate Sale Contract dated as of April 20, 1999 by and between 711 Gallimore
Partnership and The Source Information Management Company (4)
10.17 Consulting agreement dated August 31, 1998 between Herbert A. Hardt and The Source
Information Management Company(2)
10.18 Asset Purchase Agreement dated as of September 21, 1999 by and among Huck Store Fixture
Company of North Carolina, Source-Huck Store Fixture Company, Arrowood, Inc., Bryce
Russell, Jr. and Sybil Russell (11)
10.19 Irrevocable Letter of Credit No. 3022930 dated February 8, 2000, issued by Bank of America,
N.A. in the amount of $4,073,973 upon the request of Source-Myco, Inc., a Delaware
corporation, and The Source Information Management Company, a Missouri corporation, in
respect to the Industrial Project Revenue Bonds, Series 1995, issued pursuant to the Indenture
of Trust dated as of January 1, 1995 between the City of Rockford, Illinois and Amalgamated
Bank of Chicago, as trustee(13)
10.20 The Source Information Management Company Amended and Restated 1998 Omnibus
Plan(14)
10.21 Employment Agreement Between The Source Information Management Company and S.
60
Leslie Fegel dated February 6, 2001*
10.22 Employment Agreement Between The Source Information Management Company and Jason
S. Flegel dated January 3, 2001*
10.23 Employment and Non-Competition Agreement Between The Source Information Management
Company and Monte Weiner dated August 3, 2000*
10.24 Form of Letter of Intent between The Source Information Management Company and The
InterLink Companies, Inc. with respect to The Source Information Management Company
acquiring 100% of the stock of The InterLink Companies, Inc.*
21.1 Subsidiaries of the Company*
23.1 Consent of BDO Seidman, LLP*
- - ----------
* Filed herewith.
(1) Incorporated by reference to Registration Statement on Form 10-SB (File no. 0-26238)
(2) Incorporated by reference to Registration Statement on Form SB-2 (File no. 333-32733)
(3) Incorporated by reference to Form 10-KSB for the fiscal year ended January 31, 1996
(4) Incorporated by reference to Registration Statement on Form S-2 (File no. 333-76979)
(5) Incorporated by reference to Schedule 14A filed on March 9, 1999
(6) Incorporated by reference to Form S-8 (File no. 333-16059) filed on November 13, 1996
(7) Incorporated by reference to Current Report on Form 8-K filed on August 10, 1998
(8) Incorporated by reference to Current Report on Form 8-K filed on January 22, 1999
(9) Incorporated by reference to Current Report on Form 8-K filed on March 12, 1999
(10) Incorporated by reference to Form 10-KSB for the fiscal year ended January 31, 1999
(11) Incorporated by reference to Current Report on Form 8-K filed on October 6, 1999
(12) Incorporated by reference to Form 10-K for the fiscal year ended January 31, 2000
(13) Incorporated by reference to Form 10-Q for the fiscal quarter ended April 30, 2000
(14) Incorporated by reference to Form 10-Q for the fiscal quarter ended October 31, 2000